Whether you're building an empire, hustling from home or starting a side gig, you need to understand your financials. It will give you confidence, help you make informed business decisions & at the end of the day, let you know if all the effort is paying off.
This is part of a series of byte-sized info for busy people to help you understand some of the terminology in business. So let me break it down for you......
The Balance Sheet (also known as a Statement of Position) lists the assets, liabilities and equity of the business. Unlike a Profit and Loss that looks at performance over time (click here to learn what's on your Profit and Loss), a Balance Sheet looks at the health of a business at a given point in time, for example at the end of a quarter.
It is called a Balance Sheet because the elements on a Balance Sheet need to ..well, balance! Historically, the assets were listed on the left and the liabilities and equity on the right and the two totals had to match. Nowadays, you're more likely to see them listed vertically Assets > Liabilities> Equity. But the basic balancing act remains - Assets = Liabilities + Equity.
Ok, let's break down those terms!
Assets belong to the business and include things like bank accounts, office equipment, motor vehicles, accounts receivables (sales where the money hasn't actually paid), buildings, goodwill and inventory.
Liabilities include debts, loans, credit cards, accounts payable, and payroll liabilities (paygw accrued, superannuation payable etc).
Equity, in its simplest form, represents the difference. Basically were you to use all your assets to clear all your debts and obligations, what's left over is the equity in the business.
As the Balance Sheet represents the overall health of your business, you can use ratios to look at things like debt to equity, solvency and turn-over ratios on inventory as markers for long-term success.
Hey, not so hard after all? A = L+E!
Let me know if you have something that I can break down for you!