As a small business owner, I review certain numbers on my balance sheet almost every day, but other numbers on my balance sheet only get looked at about once a year. So what are the important numbers to track? And which ones are less vital?
Follow along as I reveal what the numbers mean to me and which ones I truly care about.
I take a peek at my checking account balance almost every day. Cash is probably one of the most important things to monitor in a small business; we never seem to have enough of it!
Your cash balance is one of the very first numbers in your balance sheet, usually under the “Current Assets” section. If you use accounting software, it may be more convenient to check its dashboard for your checking account balance than it is to pull up your balance sheet. That’s what I do.
If you grant credit to your customers, the accounts receivable balance is what they owe you. You might also take credit cards, and if you do, there will be an amount reflected in an accounts receivable or merchants receivable account that represents the sales you’ve made but haven’t yet cleared. There’s a one- to four-day lag with most credit-card sales.
Find your accounts receivable balance under Current Assets. If your accounts receivable balance is low, it means it’s time to get some more sales coming in.
If you enter bills into your system before paying them, you will have an accounts payable balance. This balance represents what you owe to vendors, assuming you’ve entered the bills into your system.
This balance is usually found under “Current Liabilities.”
A Quick-and-Dirty Cash Forecast
The balance sheet starts to get a little more fun when you put some of the numbers together. For service businesses, you can even do a very quick-and-dirty cash forecast by adding together your cash and accounts receivable balance, then subtracting accounts payable and any payrolls and loan payments due in the next 30 days.
If you own a manufacturing, distribution or retail business, your balance sheet will contain one or more inventory accounts. They represent the cost of the items that you have available for sale.
In looking at balance sheet numbers, there are two vital things to consider when tracking your inventory:
- How fast it sells.
- How much debt you have in relation to the inventory.
You can look at both these ideas using financial ratios.
If you have a construction company, you may have an account labeled “Costs and estimated earnings in excess of billings on uncompleted contracts.” This is a form of inventory because it’s what you’ve worked on but haven’t yet billed for. This balance can also be in the liabilities section and called “Billings in excess of costs and estimated earnings on uncompleted contracts.” In this case, you’ve billed for more work than you’ve completed.
If your company owns buildings, equipment, furniture, machinery, vehicles or other assets that will last longer than one year, then you’ll have a fixed assets balance. As your assets get older, you’ll have an account called “accumulated depreciation,” which is designed to adjust for the reduction in market value of the fixed assets as they age.
Equity and Retained Earnings
The equity section is the most mysterious part of the balance sheet. It will look different depending on the form of legal entity your business was set up as when it first launched.
If your business is a corporation, you’ll see a capital stock account and possibly an account called “additional paid-in capital.” The stock account simply represents the cash infusion you made when you started your business. Additional paid-in capital is any additional money you put into the business.
If your business is a partnership, you’ll have partners’ equity and partners’ draws, representing the amounts each partner puts in and takes out of the business, respectively.
A net income or loss account is shown in the equity section of the balance sheet, and this amount ties to the amount in your income statement.
All balance sheets also have a “retained earnings” account, which represents the accumulated amount of income or loss the company has made. This account is adjusted once a year by the accounting system, which adds or subtracts the previous year’s net income or loss.
The only time I review the equity section of my balance sheet is once a year at tax time. The equity section gives you a 30,000-foot view of your business, while the other parts of your balance sheet help you with the daily details of running a business.
For more insight on the basics of the balance sheet, check out my earlier article. To get started on your own balance sheet, click the link below to download a free template.