Balanced books may not be sexy, but they provide small business owners with the grounding they need to make smart decisions about expanding the business, making large purchases, and hiring new employees. The language of accounting professionals can be intimidating, especially if you’re the type of person whose financial record keeping consists of handing a box of receipts to your tax preparer once a year. Don’t despair! At the most basic level, you only need to understand three words: assets, liabilities, and equity. Throw in some simple addition and subtraction, and you’ve balanced your books.
To balance your books at the end of the month, you need only this simple equation:
Equity = Assets – Liabilities
For more information, our article 5 Simple Ways to Create a Balance Sheet lists the types of entries that belong in each category.
Your first task is to choose your accounting period. Most businesses balance their books for each calendar month or each quarter. When you are new to the process, balancing your books each month will make the task more manageable.
If you use a cash accounting system, as many small-business owners do, and you want to start at the most basic level, you can simply write two columns of numbers on a piece of paper: assets on one side and liabilities on the other. Total each column, subtract liabilities from assets and the resulting number should equal your business equity.
Accounting software can simplify your bookkeeping, since most banks will allow you to download account information directly into the program. After you load the data, your only task is to review the entries and make sure each one is tagged with the correct category. Keeping a separate business bank account makes this process easy and efficient.
When you subtract liabilities from assets, the resulting number may initially not equal the equity you have in your business; in fact, it could be radically different. This might seem like a good time to throw in the towel. But don’t give up yet. You are at the stage of balancing your books that accountants call creating a trial balance. This shows you whether there are any mistakes in your recordkeeping so you can rectify them — much easier to do at the end of the month or the quarter than the end of the year. Even seasoned professionals expect to make corrections at this stage.
To uncover errors, first check whether you forgot to record an entry in either column or listed the same entry twice. If not, try looking for a couple of common accounting errors. If the discrepancy is divisible by nine, it could mean you have transposed two digits. When two numbers are transposed (for example 850 instead of 580), the difference is always divisible by nine. If the discrepancy is a multiple of 10 (100, 1,000, etc.) there might be an addition or subtraction mistake in one of your columns.
When you correct the errors in your books and get them into balance, you are truly in charge of your business.
My Books Are Balanced — Now What?
Once you start balancing your books on a regular basis, you will start to see trends. Perhaps August is always a slow month, so you can shift a planned equipment purchase to September, when sales pick up. You may realize that one part of your enterprise is costing you more than it’s bringing in. Dropping that piece of the business could be a good way to increase profits.
Understanding how to balance your books is a critical skill, even if you choose to outsource your accounting as your business grows. Smart entrepreneurs know that, whatever their skills or talents, keeping an eye on the bottom line is always part of their job description.