Understanding the financials of your company, including the various financial statements, is an important part of being a successful business owner. Not only will your financial statements help you create good financial policies and procedures, it may help you get financial backing and when it comes time to sell your company good financial statements can mean all the difference.
When it comes to financial statements, which include your income and cash flow statement, your balance sheet is the only one that takes a look at your financials at any one given moment in time.
As the term implies, balance sheets must balance. The simple equation is:
Current Assets = current liabilities + owner’s equity
Let’s take a look at simple definitions of all factors in this equation.
Assets
Your assets include your cash and receivables as well as any equipment or inventory you have on hand. It may also include your investments and any properties and leases the business may own.
Liabilities
Liabilities include any debt the business has, taxes, and of course your accounts payable.
Owner’s Equity
This is the amount of money you’ve inbested into your business. If you’re the sole owner then this will be the money you’ve invested into your company. If you have investors, shareholders, then this is called shareholder’s equity. And for small businesses how much you invested is pretty simple to figure out, it’s the difference between how much you have in assets and how much you owe in liabilities!
Preparing Your Balance Sheet
So on any given day you can take a look at your assets, liabilities and how much you’ve invested and the equation should balance out. When preparing your balance sheet standard format is to have the left column list your assets or the left side of the equation and the right side list your liabilities and owner’s equity or the right side of the equation. The total of both columns should match.
Knowing this information, having it on hand, and being able to produce this information at any given point in time will provide you with tremendous information. You’ll know if you’re investing too much of your own money into your business. Having a solid grip on your business financials is a sure way to control your profits, growth and strategies.