What the Heck is a Balance Sheet? (& why do I want it?)

Seems like everyone knows what a Profit and Loss Statement (“P&L”) is.  That tells you what you made and what you spent, right?  Well not exactly.  A P&L tells you what you what income your business generated, and what expenses you had in the process of generating that income.  Wait–isn’t that what we just said?  Ah, but what you “spend” isn’t always all on “expenses”!  What?  Here’s where the “Balance Sheet” comes in.  Let me explain.

A P&L lists income and expenses in a given time period–last year, last week, last December–whatever time frame you want to include. The main thing to remember is that both the income and expenses occurred during a given period of time and then you move on.  (We all know that just because you were wildly profitable last month doesn’t mean you will be this month)  A balance sheet, on the other hand is more concerned with the overall value of your business.  It doesn’t usually include a specific date range, it reflects a given point in time.

On the balance sheet we find three things:  Assets, Liabilities, and Equity.  What?

Assets are what your business owns — the money in the bank, the company van, the desks & computers, the inventory in the warehouse, and in fact even the money people owe you (“Accounts Receivable”).

Liabilities are what your business owes — The Loan you took out to open the company, Your vehicle loan, the balance on your Visa and your American Express, the bills that have come in but that you haven’t paid yet (“Accounts Payable”), The money Uncle Frank loaned you, etc. Learn more at https://www.paydaynow.net/short-term-loans/  You might even loan your own company money–as long as it’s supposed to get paid back, it’s a liability.

Equity is both your (or several people’s) personal investment in and your take from the business.  You took $10,000 of your own money and bought the opening inventory — that’s your equity contribution (similar to a down payment on a house, it’s the money you put in)  You paid for tolls out of your pocket–that’s your equity contribution.  You draw out $1,000 free and clear every Friday–that’s a reduction in Equity (often called a “distribution”).  You used the company card by accident to grocery shop–that’s a reduction in Equity.

If I want to see how my business is doing right now–I’ll look at my P&L.  If I want to see what my business is worth, I’ll look at my Balance Sheet.

Most business owners are baffled when the P&L shows they made a boatload of money but they feel they have  nothing to show for it.  “Where did all that money go???”  Well the-e-en we look at the Balance Sheet and find loans, credit cards, and payables that have been paid with those profits.

 

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