Grow Your Business by Sorting Out Your Balance Sheet
Imagine if managing your money was straightforward, painless and fun. Can’t imagine it? If you’re like the majority of people who work for themselves, you’re not alone. The good news is, it’s not as hard as you may think to understand your sums. Just focus on 3 key documents to chart a course for financial success: your net income statement, your cash flow statement and—the topic of this article—your balance sheet.
Why you should care about your balance sheet
Essentially, your balance sheet gives anyone who’s looking—including potential “suitors” like the bank or an investor—answers to important questions. It tells you if you’re managing debt responsibly or putting the business at risk. It shows whether you’re invoicing customers regularly and on time. And it proves you’re not spending or investing money you haven’t yet earned.
Think about your balance sheet as your online-dating profile, social media page, modelling headshot and CV all wrapped into one. Then you’ll understand how important this document is—and how much it reveals about you and your approach to running a business. And once you get your head around your business’s finances, you’ll be primed and ready to grow your equity.
What your balance sheet should include
Your balance sheet should be divided up into 3 sections:
- Assets are what you own. This includes cash and accounts receivable (which you should monitor on a weekly basis) as well as your company’s inventory (including land, equipment and the like)
- Liabilities are what you owe. This could be anything from a bank loan to rent, to an employee’s wages
- Equity is what’s left after you subtract liabilities from assets
List out all your assets and their worth in a spreadsheet, asset by asset. Then list all your liabilities and their cost. Now everything is laid out clearly. This way you’ll be able to monitor everything closely without feeling overwhelmed—and your equity will be plain to see.
Here’s the rule of thumb for a winning balance sheet: Grow your assets faster than your liabilities. When this happens, one day your owner’s equity could become so robust that you’ll choose to sell your business for vast sums of money.
Plan for the unexpected
While you’re growing your assets to overcome your liabilities, here’s a tip for staying solvent: take 10% of what you earn and put it away in a rainy-day fund. No excuses. Consider that money untouchable except during a true financial emergency. Because that rainy day will always come, even if the forecast calls for clear blue skies.
What other people think
Here’s what other people who work for themselves have to say when it comes to keeping their money matters straight.
“I decided to figure out how much I was spending on vanilla lattes each month. I was so embarrassed by what I found that I bought my own machine and got a mug. I decided that was an “asset” worth investing in. (It made me want to open a coffee house, too!) It continually amazes me how small expenses and liabilities add up.” —Leslie Barber, QB Community leader
“‘So, many of us think about cash when we look backwards. My secret is in planning ahead. I know what bills are coming due in the next 30 and 60 days and can anticipate the cash I need to generate to pay them. Preparation helps me sleep at night.” —Victoria Cameron, QuickBooks ProAdvisor
“I sought out organisations that give grants and interest-free loans and applied. I actually got some funding.” —Victoria Beadz, jewellery designer
“So, many businesses go under due to ‘Death from 1000 Cuts.’ In other words, no one goes out of business in 1 day. Bankruptcy happens when we don’t manage the daily inflexion points. Chances are, we don’t even notice the ‘cuts’ that are happening every single day.” —Dawn Fotopulos, Author of Accounting for the Number Phobic: A Survival Guide for Small Business Owners
Want to learn more and explore more ways of balancing your money and getting ahead? Browse the links below!
Before you go
Are you organised with your money? Is there anything you find stressful? Comment below!