“The balance sheet can be kind of tricky to read over. It houses a company’s assets and liabilities, amongst other things. I know many clients who get a headache after only 5 minutes of reading one”.
There is a solution to all of this. Business owners have to learn how to read these things in the right way. It can be rather taxing. It can also be mentally exhausting, but it needs to be done when you own a business. A balance sheet house valuable information. You need this information so you can make well-informed choices for your business.
One of the better people to speak to about this is Brian Speier. He has helped many clients over the years to read their balance sheets better and make more sense out of them. Brian did not just come upon these tips overnight. He had to learn the hard way too. Now he is sharing these tips with us.
1) The assets have to equal the liabilities and the equity in your business. The formula is Assets=Liabilities+ shareholder responsibilities. Business owners who can understand this simple formula will understand the rest of it.
2) Business owners have to understand their current assets. This includes the money you have coming in and the money you will have coming in. When someone pays, this gets thrown into accounts receivable. This is all part of the assets your business owns.
3) You have to have a good understanding on what will be turned into cash. Some of the assets are not ready to be turned into cash yet. You have to know the difference between tangible and non-tangible assets. There is a big difference. Those who do not know the difference end up not being able to read their balance sheet correctly.
4) Your business has all different types of liabilities. Not all liabilities are classified the same. Business owners have to have a full understanding of each liability and how it affects the business. This goes for the short-term liabilities and the long-term liabilities. Each one has a bearing on your business. Labeling something as a tangible asset when it should be a liability, is one way to through off your numbers.
5) Know how much money each investor has tied up in your business. Some investors will decide to reinvest in your business after the end-of-the-year taxes. Some will not. You have to know who is going to reinvest and who will not. Assuming an investor is going to transfer over is not the right approach. This is your company’s net worth. Your balance sheet bottom line has to be equal to the real bottom line.
Go to http://BrianSpeier.com. This site can give you more information on understanding balance sheets and other questions your business may have. You can also get in touch with Brian here.