Good Balance Sheet builds Business success

A Few Business Balance Sheet Essentials

The business balance sheet is one of those essential financial statements that your business must keep if it is to succeed.
It is an essential part of business management, alongside your income and cashflow statements.

It contains all the essential business measures you cannot do without it.

Balance Sheet Dollars and Cents

Learn from your business balance sheet and you’ll discover how to properly manage your business.

Your Business Balance Sheet – Learn from it

As any business manager should be aware every business consists of two streams of money … money-in and money-out.

Track both of them carefully and provided the money-in stream is greater than the money-out stream your business will grow.

Like everything else to do with book-keeping this can be a total pain, but let me assure you, it is essential.

Tracking these money streams is a lot easier if you have prepared a business balance sheet as a projection of your company assets and liabilities into the future.

The hard work that goes into forecasting your assets and liabilities over the next twelve months and then over the next two to five years, only to find that in fact you hardly ever meet that forecast can be disheartening, if you let it be, but it still needs to be done.

The thing to remember about any form of budgeting is that the thought that goes into the preparation is what counts.

If you can begin to understand the money-out and money-in basis of business through your account books, you will begin to understand when you can and should spend money even before you see the month end figures. That is what good business is about.

Right, let’s get down to understanding your business balance sheet.

Defining The Balance Sheet …

Simply put, your business balance sheet will show you the financial position of your business at a given point in time. Now, how much more useful can it be?

A balance sheet lists your company assets, all the claims against those assets and then it balances them.

This then shows the financial strength or weakness of your business.

Balance Sheet Periods

The balance sheet periods will very much depend on the type of business we are talking about and are best based on the industry norm.

When starting out in a new business however, I would suggest that for your first year in business you project your business balance sheet on a monthly basis and then at least quarterly thereafter. Discuss this with your bookeeper or accountant.

So, what is in a balance sheet?

Well, balance sheet contents are designed for the specific business covered, but all contain similar components.

As an example let’s look at the actual year end business balance sheet of a furniture manufacturing company.

BALANCE SHEET XYZ Furniture Company
ASSETS Year 2 Year 3
Current Assets
Cash 25,000 50,000
Accounts Receivable 205,000 360,000
Inventory (stock) 462,500 575,000
Prepaid Expenses 12,500 12,500
Total Current Assets 705,000 997,500
Fixed Assets
Land 0 0
Buildings 0 0
Equipment 375,000 300,000
Accumulated Depreciation -75,000 -75,000
Total Fixed Assets 300,000 225,000
Intangibles 0 0
Other Assets 25,000 27,500
1) Total Assets (current and Fixed) 1,030,000 1,250,000
LIABLITIES AND EQUITY
Current Liabilities
Notes Payable – Short Term 150,000 106,000
Current Maturities of Long-Term Debt 75,000 75,000
Accounts Payable 205,000 215,000
Accrued Expenses 19,750 33,750
Taxes Payable 0 0
Stockholder Loans 0 0
1) Total Current Liabilities 449,750 429,750
Long-Term Debt 300,000 225,000
2) Total Liabilities 749,750 654,750
Stockholders’ Equity
Common Stock 187,500 187,500
Paid-in-capital 0 0
Retained Earnings 92,750 407,750
Total Stockholders’ Equity (1 – 2) 280,250 595,250
Total Liabilities and Equity 1,030,000 1,250,000

Table 1.2a: XYZ Furniture Co. Balance Sheet

As you can see, the total assets are balanced against the Total Liabilities and Equity, hence the name Balance Sheet.

But, to make a business balance sheet more meaningful it could and normally does contain the budgeted figures and percentage of budget columns as shown below:-

BALANCE SHEET ASSETS
Current Assets Budget Actual %
Cash 20,000 25,000 125
Accounts Receivable 195,000 205,000 105
Etc.

Table 1.2b: XYZ Furniture Co. Balance sheet

A monthly balance sheet would be identical but for the figures and twelve months figures would make up the year end balance sheet.

Reading a Business Balance Sheet

Reading Your Balance Sheet …

If you don’t understand the meaning of your balance sheet, why have one?

Learn to read your business balance sheet and you will soon understand what needs to be done to start generating value for you and your shareholders. Here’s how … Reading a Balance Sheet.

It will keep your business moving in the right direction … Your balance sheet tells all and guides the enlightened.