No matter what goal you’re pursuing, maintaining balance in life is important. And if you’re a business owner, maintaining an accurate balance sheet is important! But sometimes it can feel like you’re doing mathematical gymnastics to get everything in place. This is when having a bookkeeping coach comes in handy. Keeping your Balance Sheet healthy and correct is very important if you are looking for a loan or an investor.
To understand your balance sheet better, let’s define terms:
- Balance sheet – An “instant” picture of your company’s finances (not to be confused with a P&L which is over a period of time). Your balance sheet lists assets, liabilities, and equity. We recommend reviewing these on a regular basis, such as at the end of the month, quarter, or year.
- Accrual basis – A good way to think of this is as transactions in process. For example, when an item is purchased from you on credit, the money is considered as having exchanged hands, even though it won’t hit your account for 2-3 days. If you invoice someone, the Accrual method recognizes that as income even though you have not received the cash yet.
- Cash basis – A simplified accounting method for businesses that do not have inventory. It recognizes revenue or expenses when they hit your bank account. It does not recognize accounts receivable or accounts payable - so if you run a balance sheet in your accounting software on Cash basis, those lines should be empty.
- Inventory - If you sell products, then you probably have inventory on hand. When you purchase your products (or manufacture them), you put them in inventory and categorize it as an Asset. When you actually sell the item, then it will move out of inventory and into Cost of Goods Sold.
- Fixed assets – Fixed means they’re non-liquid/non-current assets that can’t easily be converted to cash. Your land, building, furniture, and equipment are considered fixed assets.
- Liabilities – Loans, payroll, income tax due, or any monies due to a third party are considered liabilities.
- Equity – This is the capital invested in a company at a certain period of time. The capital could be from a sole proprietor or from an investor or both. You can also think of Total Equity on the Balance sheet as the net worth of the company.
If you’re in need of a checkup before year’s end, give us a call! We’ll be happy to do a brief (or extensive) review of your books. Let us know what you’d like us to do and we can make recommendations that promote your company’s financial well-being. Our goal is your success.
Lynn Talbott, MBA, PHR, received the TSBDC’s 2015 Small Business Person of the Year Award for Chattanooga and was recognized as a 2015 Rising Star. She is the Founder and President of HR Business Solutions, LLC. Lynn was previously a Corporate Trainer and HR Manager for a Fortune 500 company in Seattle, WA. She has 20+ years’ experience advising entrepreneurs of small- to mid-sized businesses in HR and Office Management. She is a Certified QuickBooks ProAdvisor and is Xero-Certified.