Understanding Your Assets and Liabilities

Business owners are most interested to know whether or not their hard work are paying off - are they earning an income and achieving their goals? 

Many small business owners would say they do this by just monitoring how much cash they have in the bank month on month. Monitoring cash in the bank is a very simple way of managing the business and there’s more things to look at than just a bank balance.

Understandably, accounting reports aren’t the sexiest thing in the world, but they are a necessity.

One of the reports that we like to look at and encourage business owners to review is the Balance Sheet. This report is in readily available in just a few clicks in your accounting software like our user-friendly favorite Xero! Reliable reports generated from accounting softwares are real-time and can be generated in seconds if your bookkeeping is caught up.

All right, let’s get into it. 

The Balance Sheet  

Your balance sheet shows how ‘healthy or not’ your business is as of any particular time. The balance sheet is where you will see your Assets, Liabilities, and Equity. 

Assets - Cash balances in bank accounts (not credit cards), the amount your customers owe you (Accounts Receivable), and the properties and equipment that are invested into the business. These show certain strengths especially when you start comparing them to your liabilities. 

Liabilities - Includes the amount you owe to your creditors/vendors (Accounts Payable) and any loans you obtained from the bank for the business such as credit cards or business line of credit. Comparing Assets to Liabilities can show the ability to have a long term certainty with the business. If you have $500 cash and $100,000 outstanding loans, it’s likely that the business is headed in a bad direction.

Equity - this is your net stake in the business, this is what’s left of ALL your assets if you paid off ALL your liabilities. 

What are the characteristics of a ‘healthy’ balance sheet?

1. You should always have assets higher than liabilities. You must ensure that you have enough cash to pay your creditors on time

2. Adding cash from your personal account unnecessarily to achieve #1 is cheating and you are at a losing end! – A good sign that your business is progressing is when it becomes ‘self-sufficient’ – meaning the business can generate and grow cash and assets on its own after your initial investment.  The growth in cash is what the business is supposed to use to finance its operations and expansion. You also start to get returns, so in the process, your business then becomes a goose that lays golden eggs. Plus, when you have shareholder or owner influx of cash, that shows up under Equity. 

3. Diversify your cash holdings or investments. Once you have built up enough assets and capital, you can start diversifying your assets which can become income-producing assets. 

4. Pay attention to your receivables and payables. We want to ensure you’re getting paid fast so you can keep up on your payables. For more information, check out these blog posts about the best tech for processing credit cards and about how to get your accounts receivable to be automated. 

If this report overwhelms you don’t forget to reach out for help. We do free discovery calls or we can dive into your Balance Sheet on an Ask A Bookkeeper session!