Are you curious how balance sheets can help you grow your business? Consider this scenario.
It’s the end of the month and my bookkeeper just sent me my financials from my accounting system. I want to scream. I have no idea what these numbers mean and my bookkeeper doesn’t have time or doesn’t know how to explain them to me. I feel so defeated because I don’t know what questions to ask and I don’t know what I’m doing or how to use this information.
Does that sound familiar? Frustrating we know!
Accounting doesn’t have to be so hard. Here is a simple way to look at balance sheets and how to use it in your business.
What do I own? This is called your assets. Cash, inventory, receivables (invoices to clients that have not been paid yet), and equipment. Make sure everything your business owns is listed here.
What do I owe other people? You borrowed money from your uncle, an investor, 2 credit cards, and a line of credit from the bank. These should all be listed in the liabilities section. This is all the money you owe other people.
Is my business healthy? A healthy business simply owns more than it owes. If you owe more than what you own it is time to start thinking about making a plan to pay down your debts.
How much have I invested in my business or paid myself as an owner? This is called Equity. How much money you have personally invested in your business is called the owner's investment and an owner’s draw is how much money you have paid yourself. You want to see yourself getting paid more as your business grows.
How else can I use my balance sheet
Our client Ashley recently decided that it was time that she expanded her services within her current location, Ashley owned a health and wellness clinic specializing in helping athletes recover for better performance.
Ashley knew that for athletes to reach top performance that they need to recover like a top athlete which she felt included cryotherapy. Cryotherapy equipment is very expensive and was a significant cost for her business.
We sent Ashley her financial statements last month and walked her through her current profits on her profit and loss statement, her cash flow projections using her cash flow statement and then we reviewed her balance sheet to determine what funding was right for her business.
We are so proud of Ashley, with her new line of credit that we assisted her with obtaining she has fully launched her new service line. Ashley will continue to review her numbers every month to determine the success of her investment to ensure she can pay back her new loan.
Obtain Line(s) of Credit: Since balance sheets clearly define your profits and losses, creditors are able to easily gauge whether or not you qualify for credit. They can also look into whether your business has already accrued too much debt by reviewing your list of assets and liabilities.
Where to Reduce: Balance sheets break down your financial standing in every department, allowing you to determine which areas need less resources and attention. You can also find out which areas need more resources and attention directed toward them, thus improving the efficiency of your business.
To Invest or Not to Invest: Business owners considering large investments could make no bigger mistake than not looking at their balance sheets beforehand. You need to know how much cash flow is coming in and how much is going out in order to decipher what your next moves should be.
If you are not sure how to use these reports or need help creating these reports book a call and you can discover the ways that a high-level bookkeeping firm can help you uplevel your finances and help drive better business decisions.