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Hey boutique owner! Today I’m here to give you a little Balance Sheet 101. The Balance Sheet is one of the primary financial statements for a business, but unfortunately it is often ignored.
Every business owner is at least somewhat familiar with the income statement and how it shows your income & expenses. But, what’s the purpose of the balance sheet, and why does it matter? Let’s dive in and take a look together!
Balance Sheet 101: How to Read the Balance Sheet
The balance sheet is going to show you a snapshot of the financial health of your business. Just like an actual photo, it captures a specific moment (date) in time, and it is broken into 3 different sections:
- Your Assets: What you own in your business. This will include things like all the money in your bank account(s) and payment processor accounts, the inventory you have on hand, and any significant display materials or equipment you might own.
- Your Liabilities: What you owe in your business. This will include outstanding credit card balances, loan balances, and even the sales tax that you’ve collected from your customers that you owe to the appropriate state agencies.
- Your Equity: This represents your personal investment, or stake, in your business. It summarizes the money you put into the business, take out in draws/distributions, and the money you've earned in the business operations.
Let's look at your equity a little closer. Your Balance Sheet is like one giant formula, and it must always “balance”, meaning your Assets = Liabilities + Equity. If you use a bookkeeping software (like Quickbooks Online), you don't really have to worry about that formula, because the software always makes sure it's in balance. But, I think it is still important for you to know & understand how those 3 sections “fit” together.
The equation Assets = Liabilities + Equity can also be flipped so it reads a little differently, and that's Assets – Liabilities = Equity. This is actually how I like to explain the Balance Sheet to my clients & students.
This means that if you were take all of your Assets (the money in your bank & payments processor accounts, return/sell all your inventory at cost, and sell any other assets you have for cash), and use all that cash to pay off all your liabilities (credit card balances, loans, sales tax liabilities, etc…), your equity is essentially what's left over. I call this your “walking away money”. It's like the book value of your business.
Balance Sheet 101: Why you shouldn’t ignore it
The balance sheet should be reviewed every month, along with your other financial reports, because it can help you track your growth as a business. Over time, if your assets (what you own) are growing, and/or your liabilities (what you owe) are shrinking, that’s a great sign! This helps you measure the strength and health of your business beyond what your sales numbers say.
It lays all of these things out on one report so you can see how your business stands. You can also easily run this report as of certain dates, so you can easily compare your balance sheet today to what your balance sheet was a year ago.
Do you have more cash in the bank now than you did last year? Have you making progress on paying down your debts? Has your equity grown/increased? Your balance sheet will be able to easily tell you these things!
If you ever choose to SELL your business, this report will be important. A potential buyer will want to see that you business is actually WORTH something on paper, over and above what the regular sales numbers are.
The balance sheet is also important if you ever want to apply for a business loan or attract investors. They’ll want to see this snapshot of your business, to see if you’re able to meet your current debt obligations first.
I dive a little deeper on The Important of the Balance Sheet in this post if you want to learn even more about it!
If you want to see a real example of a Balance Sheet in action, then I want to invite you to register for my on-demand masterclass, Make Your Money Make Sense, where I go more in depth on all 3 of the primary financial statements & how they all work together to give you a full picture of your boutique's financial health. You can register to watch it here.
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