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Every business owner generally knows what the income statement is, but not all business owners understand the importance of the balance sheet. If that sounds like you, then keep reading!
Today, we’re going to take a look at what your balance sheet will tell you about your business & why it matters, so grab your favorite beverage, and cozy up!
What’s on the Balance Sheet?
Where your income statement shows the day-to-day sales & activity in your business, your balance sheet will show you the bigger picture of whether your boutique is financially strong and stable. As a boutique owner, your balance sheet is going to help you see if you’re building wealth in your business, or just running on borrowed money.
Think of your balance sheet like a snapshot of the financial health of your business. Just like a photo, it’s showing information as of a single point in time, and it’s grouped into 3 primary sections:
- What you own (assets)
- What you owe (liabilities)
- Your personal stake in the business (equity)
(If you need a more thorough review of these terms, check out the post “Understanding the Chart of Accounts for Retail Businesses”)
Just like the name suggests, a balance sheet will “balance”, meaning that your total assets will equal your total liabilities + the total equity.
Another way to read it is to say your total assets minus your total liabilities equals your equity. That means that if you decided to close up shop and take all your assets, pay off all your liabilities (debts), the equity in your business is what you’d be left with.
A “strong” balance sheet will have more assets than liabilities, meaning if you WANTED to, you could cash out your assets to pay off your debts, and still have money left over. Having a strong balance sheet also means that you have the assets (cash) on hand that will help your business survive the slower seasons of business.
Not All Transactions Affect Your Income Statement
Like I said before, everyone is familiar with the purpose of the income statement. But, did you know that not all the transactions in your business affect the income statement? Here are a few examples of transactions that only affect your balance sheet:
Transferring money from your business checking to your personal checking
This is removing money from the business (decreasing the asset) , while also decreasing your equity, or your investment, in the business.
Making your sales tax payment to the state
This is using your cash assets to pay down your liability to the state.
Making a payment towards a credit card
Again, using an asset to pay for a liability.
Buying inventory
This decreases the cash in your business, but increases the inventory asset.
If a balance sheet has assets or liabilities with a negative balance, that is a big indicator that things are being recorded incorrectly. Every number on the balance sheet should be able to be verified against some type of document – a bank statement, credit card statement, point of sale report, loan document, etc…
Why Does it Matter?
Your balance sheet is a critical document when you’re in need of financing, like applying for a business loan. Lenders want to see the big picture of your financial health, not just your profits. They want to see that you have a healthy foundation, and that you don’t already owe more than you can handle. They want to make sure their investment in your business is well protected.
Certain business types (S Corps and Partnerships) even need to include a balance sheet with their annual income tax return. Often times, tax preparers will just make the necessary adjusting entries in Quickbooks to “correct” balances so they match the statements & reports they should, but this doesn’t necessarily catch any bookkeeping mistakes that CAUSED those errors throughout the year.
But even just for yourself, you want to keep tabs on the balance sheet for your own business to make sure you’re growing as a business. If you use a bookkeeping software like Quickbooks Online, it is easy to run a Balance Sheet report as of any day you choose. You can easily run it as of 12/31 for each year you’ve been in business and see how your business has (hopefully) grown and strengthened over time.
I hope this post has encouraged you to start keeping tabs on your balance sheet, and start reviewing it on a regular basis.
If you want to take a closer look at a boutique-specific balance sheet, I want to invite you to watch my free masterclass, “Make Your Money Make Sense”. In that training I’ll walk you through all THREE primary financial reports so you can see how they work together to show the whole financial story of your boutique.
If you’re ready to learn how to create & manage your own balance sheet in Quickbooks, you can enroll in Bookkeeping Made Simple for Boutiques today and be walked through the entire process in our step by step videos.
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