Knowledge is power, especially when it comes to the financial health of your company. The worst thing you can do as a business owner is bury your head in the sand and hope for the best. Learning all there is to know about your savvy accounting tools and how to use them effectively is the best way to get to grips with your financial standing and it gives you the ability to take control and plan for success.
This sounds super simple but when it comes to technology and numbers and with so much at stake it’s easy to become overwhelmed. The best place to start is with your balance sheet. It’s an invaluable tool that gives you a screenshot of your net worth at any given time and with the right information it’s easy to utilise. Continue reading to learn the ins and outs of balance sheets and why you should start using one today.
Balance Sheet Basics
A balance sheet, also known as a statement of financial position, details your current financial standing at a given point in time. There are three fundamental points to consider when using your balance sheet and these are assets, liabilities and owner’s equity – don’t worry we’ll cover this in more detail later. These three cogs in your balance sheet machine work harmoniously together to produce an accurate picture of your financial position and net worth, providing you with the data you need to make informed decisions and successful strategic business plans. The beauty of this intelligent tool is that you can use it at any time, you don’t have to wait for quarterly or annual statements, the power is in your hands.
When it comes to balance sheets, unfortunately, a highly skilled business owner and years of industry experience are not recognised assets. Although undoubtedly an added bonus, an asset is anything that a company owns with monetary value. This does include cash, property and intangibles of value such as patents and trademarks. You’ll notice assets are categorised by how quickly they are likely to be turned into cash or sold with cash accounts coming at the top of the list while long term investments sit at the bottom. Finally, total assets are calculated and this figure will remain at the bottom of this section until later down the line.
Listing your liabilities may be a bitter pill to swallow in comparison to reflecting on your assets as these relate to what your company owes to others. This includes loans, wages, credit cards and taxes and similarly to your assets they are categorised based on the timeframe in which you expect they will cash out. This information in comparison with your assets, alone will give you a rough idea of how stable your business is as well as an indication of growth. It is, however, the next step in this process that will give you all the material you need to see the clear and more definitive picture of your business.
It’s at this point you’ll be able to get to grips with what you’ve been waiting for, your net worth. Also referred to as owner’s equity this information will tell you how current business has measured up to your expectations. Your net worth is calculated by deducting your liabilities from your assets which tell you what would be left if you sold your company. It’s worth remembering that this is only relevant for a short time. As soon as you make a transaction or a sale this information will change so regular reflection is encouraged for accurate reporting.
Utilising data from your balance sheet is just the beginning of your journey towards financial control. Mastering this mechanism will give you an insight to the possibilities of accounting software and a kickstart a new, more switched on, you.