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One of the reports used by a small business to assess their financial story is the Balance Sheet. The Balance Sheet is a financial report listing the assets, liabilities, and owner’s equity (or net assets) of an organization.
Assets = Liabilities + Owner’s Equity (Net Assets)
The balance sheet is important because it reports on what the organization owns, what it owes, and its net value.
The report may also be referred to as a Statement of Financial Position.
The values reported on the Balance Sheet are as of a specific point in time.
Assets can be further defined as either short term/current or long term/non-current. Short-Term assets can be easily converted into cash or are typically used within twelve months. Long-Term (non-current) assets have a “life” of longer than one year, either by use or conversion into cash.
Fixed assets are tangible items with a use of longer than one year. As the fixed assets are used, their value decreases. Depreciation is the calculation recorded to lower the holding value of the fixed assets. When an asset is sold, the amount received may not be equal to what is recorded in the books. Depreciation is an estimated calculation. Generally accepted tables and guidelines are available to help with these calculations.
Debt – credit card, loans, money borrowed
The value left after Assets are reduced by the outstanding Liabilities. The amount that the owner could put into their pocket after settling their debts.
Assets – Liabilities = Owner’s Equity (Net Assets)
“I know you think you understand what you thought I said but I’m not sure you realize that what you heard is not what I meant.” Alan Greenspan
As a small business financial advisor, I aspire for my clients to experience business success. And one method to achieve success is for them to comprehend the financial side of their business.
From that paragraph did you get the message I intended, or did you just read: “blah, blah, blah”
How about this statement:
I want you to be successful and understanding your business’s numbers helps you make smarter business decisions.
One way to tell the story of your small business is through Financial Reports. Reporting provides insights into what is happening with the business. How are sales trending, how about expenses, how is cash really being used?
When you look at your business’s financials does it look like this:
Or do you feel like your numbers look like this?
Your financial advisor is the one who helps to take your small business numbers from a jumbled mess to an orderly message.
An orderly financial message is conveyed through various reports. Reports are used to understand the financial story of the business. This information helps you to make more informed decisions. And when you make informed decisions your business is more successful!
Because each business is unique, the reports a business finds useful are unique.
In the next post we will leap into the Balance Sheet.
Share below if there is something financial about your small business you wish you knew more about.