Balance Sheet
Lesson 8 from: The Small Business Simple Guide to FinancesAmy Northard
Balance Sheet
Lesson 8 from: The Small Business Simple Guide to FinancesAmy Northard
Lesson Info
8. Balance Sheet
Lessons
Know Your Worth
1The Foundation of Your Business
09:38 2Creating a Usable Bookkeeping System
05:52 3Taxes
06:45 4Get Paid
05:48 5Small Business Deductions
06:30 6Retirement Contributions
06:12 7Income Statements
05:26Balance Sheet
05:39The Foundation of Your Business
Lesson Info
Balance Sheet
1 (jaunty music) 2 Welcome to lesson eight. 3 Today's lesson is all about using a balance sheet 4 to understand your business. 5 Our two goals for this lesson 6 are understand how to read your balance sheet 7 and analyze your balance sheet 8 to understand your business finances. 9 A balance sheet allows you to fully understand 10 what you own and what you owe. 11 As the name suggests, balance sheets must be balanced. 12 What that means is that the total assets must be equal 13 to the sum of the liabilities and owners' equity. 14 We'll look at all that in a second. 15 You'll want to understand what your balance sheet shows 16 about your financial status because you can use 17 your balance sheet to make sure your business 18 is headed in a healthy financial direction. 19 Additionally, banks and investors 20 will use your balance sheet when considering 21 whether or not to give your business money. 22 Just like we did with the income statements 23 let's take a look at an example of a ba...
lance sheet 24 to really understand how to read it. 25 The balance sheet we'll be reviewing belongs to Jill. 26 Jill creates beautiful clothing, 27 which she sells in her online store, 28 along with working on commissions for custom orders. 29 At the end of last year this was Jill's balance sheet. 30 You'll notice the balance sheet 31 is divided into three sections, 32 assets, liabilities, and owner's equity. 33 You'll also notice that Jill's balance sheet is balanced 34 because her total asset amount is equal 35 to the total of her liabilities and owner's equity. 36 When looking at the asset section of a balance sheet, 37 you'll see four different items. 38 First, the cash and cash equivalence 39 is pretty self-explanatory. 40 That's how much money is in 41 the business checking and savings account. 42 This can also include any investments you've made 43 that will mature within three months. 44 Next, inventory details the value of goods 45 already in stock that are ready for sale. 46 If you work in a service business like writing or design, 47 your inventory will likely be zero. 48 Another item in assets is accounts receivable, 49 which shows how much money is due from customers 50 for work you've already done including outstanding invoices. 51 Finally, there's equipment. 52 Sometimes these are separated out into long-term assets 53 if they are things that cannot be readily 54 converted into cash, like computers, 55 owned office, or studio space or manufacturing equipment. 56 Next, we get into what your business owes 57 or its liabilities. 58 This is broken down into accounts payable, 59 which is how much you owe to suppliers 60 for goods and services you've received, 61 and notes payable, which is how much you owe them for loans. 62 Sometimes short term liabilities such as credit card debt 63 will also be broken out into a separate category. 64 Finally, we're left with 65 the owner's equity section of the balance sheet. 66 This shows how much of the business you own 67 after all debts are considered. 68 This includes common stock, which is the amount of money 69 you and other business owners have put into the business, 70 and retained earnings, which is the sum of all the profits 71 you've made that have been kept in the business 72 rather than paid out to yourself or other owners. 73 Retained earnings may be different than cash in the bank, 74 since you've likely reinvested some of those profits 75 into other assets for your business, 76 like purchasing equipment or creating inventory. 77 Additionally, when doing your bookkeeping, 78 remember that personal funds taken out and put 79 into your business always pass through owner's equity. 80 You'll record these transactions 81 either as an owner's contribution or an owner's draw. 82 Owner's contributions include business purchases 83 made with a personal card, 84 as well as money invested into the business. 85 Owners draws include personal expenses 86 like money withdrawn from your business for owner pay 87 that wasn't ran through payroll. 88 Now that you know what to look for on a balance sheet, 89 let's talk about how you can analyze what you see. 90 When reviewing your balance sheet, you'll want 91 to pay attention to a couple things. 92 First, you'll want to make sure you're keeping up 93 with everything and that the balances are correct. 94 Again, if the sum of your liabilities and your equity 95 don't add up to the same amount as your assets, 96 then your sheet isn't balanced. 97 If that happens, you'll want to look back 98 at your bookkeeping to make sure everything 99 is recorded accurately. 100 Next, you'll wanna keep an eye 101 on how your assets and liabilities compare. 102 If your liabilities surpass your assets, 103 then your business is losing money 104 and could be headed towards bankruptcy. 105 It's also valuable to look at your balance sheet over time 106 to understand if and how the company is growing. 107 For example, let's compare Jill's year-end balance sheets 108 from the past two years. 109 By comparing the total on these two balances, 110 Jill can see that everything appears to be going well. 111 Even though her liabilities are higher 112 because she took on a small additional loan in 2021, 113 the investment seems to have paid off 114 in increasing her assets and equity over time. 115 You can draw these same types of conclusions 116 by analyzing your balance sheets over time. 117 I can't believe it, but you've already made it 118 to the end of this course. 119 I hope you've found the learning valuable 120 and easy to understand. 121 I put a lot of thought into this course, 122 and I know that if you put these lessons 123 into action in your business, you can find success.
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