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Do you know what your business owns and owes? Do you know what your business makes and spends? More importantly – do you know what the equity is in your business or what it might be worth? It’s typical for an entrepreneur or for someone running a business to say “yes I know what we make and spend” but unlikely that they know what they own/owe and what the equity in their business is or what the value might be. Small and medium sized businesses can be so focused on surviving that they often don’t take time to see if the needle is moving in the right direction with respect to the equity or value of their business. This is unfortunate because one of the very reason businesses are started is to build value and one day be able to cash in or have that value recognized.
So where is the best place to start if you can relate to this?
The very first thing I do when I meet with an entrepreneur or business owner that is looking for help through our platform – www.mlenow.ca – is to review the balance sheet for the business. This usually changes the tone of the meeting as the folks I am sitting with have not usually reviewed this on their own and are not in a position to respond to the questions I ask. I don’t do this to catch someone off guard as much as I do this because to me the balance sheet is an overlooked resource for determining business goals, strategy and plans. It also helps start interesting conversations.
Quick Financial Statement Summary
Balance Sheet – what does your business own (Assets), what does your business owe (Liabilities) and what’s left over as equity?
Income Statement / Profit and Loss Statement – what does your business make (Revenue), what does your business spend (Expenses) and what’s left over as profit?
I think of a balance sheet much like I think of a personal net worth statement. When you and I want to know what we are “worth” we add up everything we own (assets) and subtract everything we owe (liabilities) to determine what our net worth is. Usually we will have some goals with our financial planners or advisors about how much our net worth needs to be to provide for our financial future and this number is something we are comfortable understanding. It’s no different with a balance sheet. If you know where your business is going strategically you should also know where it is going financially and what the equity should be at various points along your business plan. But this is not usually the case.
In my experience this is because the Income Statement (or Profit and Loss Statement) is easier to understand so it gets the most attention. To me that’s like paying attention to your income tax return for purposes of planning your personal finances. I don’t know about you but I usually review my tax return at tax time and don’t tend to refer to it much during the year. I have a budget I use every month to track my expenses which a business should be doing as well however my personal net worth statement is what I think about when making financial decisions just like a balance sheet should do for your business.
The easiest place to start is to print out your balance sheet for the last 4 financial quarters of your business. Line them up side by side and start to look at the line items that make sense to you. For example, you may start with “Cash” under Assets and see that your cash balance is going up, down or staying the same. You should be able to understand why this is happening and have some opinions about what your business can do to improve this line item. Next you can move on to Accounts Receivable under Assets to see how much your customers or clients typically owe your business and then compare it to Accounts Payable under Liabilities to see how much your business owes vendors and suppliers. Hopefully the money owed to your business from customers is greater than what your business owes to vendors but this exercise alone can begin to produce some interesting results. You can compare each of the line items on your balance sheet to really get a sense of how your business is building (or not) equity and value.
Don’t get discouraged if you think this is confusing. While you don’t need to be a financial expert to run a business you should have a high level understanding of your business and the highlights of your financial statements to help you manage and adjust your business plan as needed. If this is something you want help with, we certainly would welcome the opportunity to help. Visit www.mlenow.ca to explore what your business might be able to do.
I created mlenow.ca to help businesses looking for ideas, money and results. Our team gets up every day to help businesses that find themselves in this position. Let’s chat and connect if you (or someone you know) needs some help with their business.