Every business owner watches their revenue figures from month-to-month and year-to-year. Most of them also look at their expenses fairly regularly - at least to see if they are making any money. But few business owners take the time needed to really look at and understand their balance sheet. The balance sheet can be the key to both knowing your profit and loss (P&L) statement is accurate as well as reviewing items that don’t show on the P&L.
Where do you start after you print it out or pull a balance sheet up on your screen? Here are a few things to look at (we recommend printing a comparison to the prior year):
Review your balances to make sure they’re accurate.
Are the balances for banks, credit cards, tax liabilities, and loans reasonably close to what the statements show?
Is the inventory value reasonable?
Are all assets like vehicles, furniture, computers, etc. valued correctly? Is accumulated depreciation recorded?
There shouldn’t be any negative numbers in Assets, except for accumulated depreciation, nor in Liabilities. There are often negative numbers in Equity.
Are all of your loans, credit cards, and tax liabilities listed?
Look at the change in your owner contributions, draws, and distributions.
Are you pouring money into your company to keep it afloat?
Are you taking out more money than you’re making?
Are you keeping money in your business for future needs and investment?
Look at the changes in your Assets, Liabilities and Equity.
These are items that affect your cash flow. Many times, when the profit and loss statement is positive, business owners think they have plenty of cash to spend and wonder why their bank balance doesn’t reflect that. Loan payments, fixed asset purchases, and owner draws or distributions can use up large amounts of cash never reflected on the P&L.
Research ratios for your industry.
Using the profit and loss statement and the balance sheet, see how your numbers stack up. What changes do you need to make? For bonus information on your financial numbers click here: 7 Best Financial Ratios for a Small Business
Your financial reports paint a clear picture of your business. It’s important to have accurate information to be able to make sure the picture you’re seeing is really what’s there. It’s also important to consistently look at the reports to guide where you want to go.
Need some help looking at your financial statements and getting them in order?
Reach out to us today - we’d love to help!
Comments