Kasfia Rashid - "Money Matters with Kash the Bookkeeper"
Hello! Welcome to Money Matters with me, Kash the bookkeeper! Accounting is the language of business. If you own a business or you are thinking of starting a business, you need to know your numbers and how to use them!
Money matters is all about the fundamental basics of the accounting language, Assets, Liabilities, Owner’s Equity, Revenue and Expenses. These building blocks of business can be arranged and rearranged for a customized experience. Once you understand the basics of any language it is much easier to communicate using that language.
We have discussed gaining assets, leveraging liabilities, and the business owners’ worth in the company, with bookkeeping breadcrumbs scattered throughout. Need to catch up? Click here for all of the prior shows: https://feed.pod.co/money-matters-with-kash-the-bookkeeper
It is now time to bring all those concepts together on one financial statement, the Balance Sheet!
Show Objectives - The Why
The Accounting definition of “Balance sheet” is: “A balance sheet is one of four basic accounting financial statements. The balance sheet uses the accounting equation (assets = liabilities + owner’s equity) to show a financial picture of the business on a specific day.”
If liabilities are the stepsisters of assets then the balance sheet is the ugly step sister of the financial statements. Most small business owners are obsessed with their profit and loss statements. So obsessed that they often forget about the balance sheet completely. However, the balance sheet is a more stable indication of the overall health and potential longevity of the business.
When valuing a company or considering an investment opportunity, Analysts and investors normally start by examining the balance sheet. Why? Well…. the balance sheet is a snapshot of a company's assets and liabilities at a single point in time, not spread over the course of a year such as with the income statement.
The balance sheet is one of three important financial statements intended to give investors a window into a company's financial condition at a specific point in time.
A strong balance sheet usually means high assets, including a large cash reserve, very little or no debt and a high amount of shareholder's equity. All else being equal, a company with a solid balance sheet can endure tough economic cycles compared to one with a weaker financial footing.
Key Issues - Owner Perspective:
People say that "the numbers don't lie," and in business, the numbers are EVERYTHING. Balance sheets are important for many reasons, but the common ones are:
Using a company's balance sheet, a savvy investor can quickly calculate the ratio of current assets / current liabilities. The higher the ratio ( more than 1!) the better financial position the company is in compared to companies of a ratio less than 1. Likewise, the debt-to-equity ratio compares the company's liabilities total to owner’s equity. A higher amount the greater the financial burden is on the company and its shareholders.
What You Need to Know - The What
The balance sheet is a check on all the other financial statements of your business. If the balance sheet is not in balance then something has been categorized incorrectly. You can run the balance sheet using either accounting method cash or accrual.
The balance sheet reveals the financial stability of a business “as of” a specific date. That means that the numbers on the balance sheet are frozen in time. If you have been in business for more than a year, you will want to run comparative balance sheets; to compare and contrast the health of your business and to identify trends in each category.
The main components of the balance sheet are the assets section, the liabilities section and the equity section. In each section several sub-categories should be present. By comparing the ratios between assets and liabilities, liabilities and equity, you can gain valuable information to make key business decisions.
Bankers, attorneys, investors, and other business partners all use the balance sheets of a company to determine if that company can handle additional debt, pay off current debt, have enough cash to pay dividends, and how much each owner can profit from the business.
What You Need to Do - The How
A proper balance sheet lists assets and liabilities in an easy to understand method. Current and long-term assets reflect the company’s ability to generate cash and sustain operations. Short- and long-term debts should be in order of priority. The equity section should follow the same pattern of logic. Each owner should have separate equity categories, making it easy to determine each owner's investment in the company.
The balance sheet should be reviewed every time the profit and loss are reviewed. Bank and credit card reconciliations should be completed each month, liabilities should be updated each month to account for interest and pay offs and the owner’s should be able to answer the question “ How much would I walk away with if the company had to close its doors today?”
Preparing and understanding your company’s financial statements is an important part of being a small business owner. The balance sheet is particularly helpful in that it keeps both you and your stakeholders informed of your financial standing. Keeping this information updated can help you make better management decisions. In addition, it may improve your business’s operational efficiency, borrowing habits, and overall financial health.
Previous: Owner’s Equity- You are worth it!
Next: Revenue: All that glitters is gold, right?
Written by Kash the bookkeeper
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