I’ve been thinking a lot about balance sheets lately. They have so much valuable information about your company’s financial health and I am often surprised by how many business owners don’t use them.
A balance sheet is often described as “a snapshot of a company’s financial condition” And how cool is that – having all that information in one place.
If you have set up your books correctly, you should always have a balance sheet. Almost every business has a checking account. credit card, or line of credit. All of those items show up as liabilities on the balance sheet. If your company owns vehicles, buildings, large equipment; those items show up as assets. It is the document that can give you a long=term view of your company and a possible buyer or investor its value. It’s where you track your cash contributions (owner investments) to make sure that you are reimbursed when you sell your company.
Setting it up shouldn’t be a slap-dash casual thing. You should have a conversation with your tax accountant about those items that will be depreciated or whether there are long-term liabilities and how you will record your owner’s draws and investments. These all have tax implications.
If you use sales receipts and write checks, there is a temptation to ignore your balance sheet and use your Profit and Loss (P&L) to track your business but I want you to think about at least entering your vendor bill then processing the payments. The advantage of doing this is that it allows you to keep track of – and an eye on – your payables. It is a lot easier to know who you owe when it is available in your bookkeeping software. And the bonus is that you can set up restrictions that won’t allow someone access to the sensitive areas of your bookkeeping software – like payroll – and still have them enter the bills and credit card charges, allowing you to have a running total of your expenses. So an admin can take over this data entry for you.
If you invoice your clients, there is often a delay between the client receiving it and you receiving your payment. This is when invoices come in handy. They show up on the balance sheet as receivables – a predictor of income to be received later. How cool could it be see in one place what is owed to you and what is due to your vendors.
You can set up your books to run accrual (tracking receivables and payables not yet received or paid) even when run your company on a cash-basis. Your tax accountant will know what to do so that you don’t pay taxes on income that has not yet made it into your bank account.
A P&L reflects the “now”. A Balance Sheet reflects the “future”.
Just a thought.