7 January 2007
Small Biz 101: Know your balance sheet
When your business is small, you should focus 100% on your cash flow. However, when you start to grow and cash isn’t as tight, it’s really important to get to know your balance sheet.
For those who don’t know, a balance sheet is a report (usually generated by your accounting software or accountant) that shows the current value of your business.
You’re building something valuable
Why is it so important to regularly review your balance sheet?
It’s simple: you want your business to be worth as much as possible. The amazing thing about running your own company is that not only are you paying yourself a salary that you’re (hopefully) happy with, you’re creating something that you can sell for quite a bit of money some day!
You should be actively monitoring the value of your company (your balance sheet) and be aware how much it’s worth. Has it gone up in value over the past quarter? Down in value? Why?
Knowing exactly what’s going on is vital to keeping your business growing and valuable.
Give me the nitty gritty
So how do we do it at Carson Systems? Well, we use QuickBooks. This is unfortunate, as its reporting capabilities are very poor. It’s great for viewing Accounts Receivable/Payable and other cash flow related issues, but it really sucks when it comes to viewing a valid Profit & Loss Statement (P&L), or the Balance Sheet.
So what we do is have our accountant prepare a monthly report with both our P&L and our Balance Sheet. We have him compare the current month to the last month and also the current month with the same month the previous year. This gives us a good idea how we’re preforming.
How do you do it?
If you’re a business whiz, please share your tips in monitoring and keeping your Balance Sheet healthy!
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Matt Carey
# January 7, 2007 - 8:12 pm
Interesting that you use QuickBooks. Ever since we started our studio (4 years ago) we have been using Sage. Yes it only runs on a PC, but it is pretty much the industry standard for accountants and bookkeepers. It has great reporting, P&L etc, and we know that our bookkeeper just sends the sage file to our accountant at regular intervals and it will all tie-in perfectly.
I used to have Sage running on virtual PC on my powerbook so I could read the Sage file that our bookkeeper sent us each month/quarter, but now with my MBP and Parallels Desktop it runs great
Blake P.
# January 7, 2007 - 10:45 pm
We work the same way because of Quickbooks’ inadequacies. Paying the extra amount for the accountant is worth every penny. Especially around tax time.
Jon Leighton
# January 7, 2007 - 10:45 pm
I hate to be an annoying pedantic person, but someone has to do it, so I think you meant “You’re” rather than “Your” in the first subtitle.
Peter Cooper
# January 8, 2007 - 5:42 am
I just read a book I bought from Amazon called “Finance for Non-financial Managers in a Week” which went into how to make and read balance sheets, P&L statements, and all sorts of other things. It’s really short and a quick, easy read.. so I’d recommend it to anyone else who wants to get up to speed with these things (or who just needs a refresher).
Ryan Carson
# January 8, 2007 - 6:10 am
Thanks Jon :)
Ryan Carson
# January 8, 2007 - 6:12 am
Great suggestion. That’s a good book. Another quality book is Analysing Companies
Greg
# January 8, 2007 - 5:04 pm
I’ve been using Quickbooks for a small RE biz and I’ve found that it is no good at keeping track of the ACTUAL value of assets as it is too focused on keeping track of the BOOK value of the assets.
In an asset based buisness like RE, the distortion is very significant.
Allen
# January 8, 2007 - 7:56 pm
Ryan – as a former public accountant, I can share with you that the balance sheet(BS) is not the only measure of a company’s worth. In fact, usually the Income Statement(IS) and Statement of Cash Flows are much more important.
Quickbooks is a good tool for a small business (I am thinking you might be bigger than QB can handle) but as a company grows, using a real accountant can always be good. Especially for tax time which I hear is even worse in the UK.
The balance sheet shows you the balance of assets and liabilities you have accumulated for the specific period of time.
But as you note, the combo of the BS and IS is the real key.
Also – it is critical that one understands how a balance sheet works. As I worked with clients in my former life, I know that many times they are completely confused as to why an account like cash would be debited to increase value and not credited to increase value.
Ryan Carson
# January 9, 2007 - 12:37 am
Thanks Allen – I heartily agree!
Adonis Lamar
# January 13, 2007 - 6:24 am
As a finance student, I completely agree with Allen. I haven’t had the opportunity to read the titles mentioned in the other comments, but I would strongly suggest that one read “The Portable MBA in Finance and Accounting.” It explains the significance of financial statements and their relationships to one another and the business as a whole. I have found it to be an excellent reference.
Ryan Carson
# January 13, 2007 - 1:39 pm
Thanks for the tip Adonis. I’ll check that one out.
Mike Poskitt
# January 29, 2007 - 4:09 pm
Probably a one-off visit, but I think Quickbooks is really easy to use for a non-accountant and easily exports to Excel for reports writing (I guess only good if you’re happy with Excel!). I reckon it knocks the spots off Sage (which I really don’t like!).
Carol
# March 14, 2007 - 12:36 am
Have to agree with Mike.