Your Balance Sheet-What is It and What Role Does It Play?
Take a look at your own Balance Sheet, aka BS, as we look at the sample provided.
Your Balance Sheet shows a snapshot of your company as of one particular date. These accounts have a life of their own, a life that’s just as long as the life of your business. They increase and decrease depending on what’s happening in your business, but they never clear out or start over. (That’s what happens to Profit and Loss Statement accounts.)
The Balance Sheet shows all your assets, or things that you own, such as your business bank account, your equipment, and your liquor license. This BS has recipes, goodwill, and a covenant not to compete because this business was purchased.
It also shows all the liabilities, people you owe money to, such as credit card balances you may be carrying, the line of credit you have at the bank, payroll liabilities and any monies YOU as the shareholder or owner may have loaned to the business.
It also shows Owners Equity, which is essentially the net worth of the business. Assets, all the stuff you own, minus Liabilities, all the people you owe, equals Owners Equity or net worth. Just like your personal net worth, your businesses equity shows the health of your business as a whole. The Profit and Loss statement indicates if you’re having a good year or not. The Balance Sheet combines all those years to illustrate the overall well-being of the company.
Retained Earnings, RE, shows any profit the business has made that hasn’t been taken out of the company yet. Keep in mind, Owner’s Draw, the way you take money out of the business for personal use, comes out of, and therefore reduces, Retained Earnings. (Don’t confuse this with being tax deductible.)
Retained Earnings can be negative. This can mean that you’ve had more losses than profits over the years, maybe because you’re just getting started as in the sample Balance Sheet. Or, negative RE can mean you’ve spent more money on personal items than the company has made.
Negative RE can mean the company is in bad shape, or just getting started.
Or that the owner isn’t taking good care of the business
Or a combination of both
Now look at your own balance sheet😊
First, do the top and bottom match? It’s called a balance sheet because it’s supposed to balance! If not, you have a serious data entry problem.
How does your cash look?
Do you have a lot of debt?
Is your Retained Earnings account negative or positive?
Review your Balance Sheet every month, at minimum, and look for patterns and changes.
