Mysteries of the Balance Sheet

In terms of financial reports, the Profit and Loss statement is fairly straightforward and easily understood. Income is money in, expenses are money out and the difference is your profit or loss.

The balance sheet is much less clear and requires more analysis to understand. I am not going to go into all the complexities.

The initial thing that is unusual about the balance sheet is that it is the sum of ALL of the transactions since the company started, while the profit and loss is a snapshot in time.

Some of the key things to look at are the current assets, such as bank account balances, PayPal balances etc. This tells you how liquid you are and how much money you have to “spend”.

It would be awesome if your current assets were $50,000 but before you celebrate, you need to look at your current liabilities, credit card balances, short term loans, sales tax, and payroll tax liabilities. If those add up to more than $50,000, then you are not at well off and actually would have no cash if your debts are paid.

Two other key accounts in terms of assets and liabilities are accounts payable and accounts receivable. Not all companies use these accounts – if bills are paid immediately and services rendered paid for at the time the service is delivered, then there is no need for invoices and bills.

Assuming you use QuickBooks, the challenge is entering the invoices and bills correctly and then also the payments sent and received. It is possible to have Accounts Receivable showing $50,000 in outstanding invoices – which looks very promising for your cash flow. But closer examination of the AR one customer and one invoice at a time reveals that the invoice has either been paid or the customer refuses to pay or is out of business or in bankruptcy. Once the AR is cleaned up, the number may drop substantially.

If you do not follow the logic in QuickBooks, the accounts payable number can also be skewed. The advantage of entering bills in QB is that you know what is owed and when it is due and you can prioritize your invoices for payment. Unfortunately, it is all too easy to enter a bill and then forget it is in accounts payable and just write a check to pay the bill. While that gets the vendor paid, it does not remove the bill from accounts payments and makes it look like you have more debt than you actually do.

It is helpful is to compare the balance sheet at the end of prior year to the end of the current year. Change in current assets and current liabilities shows the financial direction the company is heading.

Have questions, want to learn more, feel free to contact me, Cathy Fishman, at 215 262-4322 to discuss.

Low Cash Flow Could Put You Out Of Business

12 Ways to get money in faster

  1. Issue invoices promptly and with enough detail that clients remember what product or service they are paying for.
  2. Have a standard price list for most items and services. Every transaction should not be a price exception. Review and update the standard price list periodically.
  3. If you are too busy with day-to-day responsibilities to generate invoices, delegate the task to someone else. (Delegating is much easier if you have standard prices and procedures).
  4. Enter checks received in QuickBooks as they are received. This will provide you with a correct and current list of outstanding invoices.
  5. Develop procedures for following up on unpaid invoices and a set schedule for doing so. You can easily outsource or delegate this task.
  6. Deposit checks promptly so they do not get lost or misplaced.
  7. Save yourself all the above steps above by accepting credit and debit cards. Many phone apps allow you to receive payment immediately even if you do not have a brick-and-mortar office. PayPal also lets you receive payments on the spot.
  8. For large projects, receive a retainer or deposit before starting work.
  9. If the invoice is based on work-in-progress, send the second and third invoices at the appropriate times. Do not assume the customer will remember to pay the installments on time.
  10. If a client has substantial unpaid invoices, refuse to do any more work until the client pays the outstanding invoices.
  11. If clients’ charges are the same every month, set up an automated ACH withdrawal from their account. No paper, no late payments, nothing to remember.
  12. If your email follow-ups about payment get no response, call the client or mail a copy of the invoice with a handwritten note stating how overdue it is. Emailed invoices do sometimes get lost in the deluge of emails.


Being Generous Can Kill Your Small Business

Most of us were raised to be good people, to be kind to others and to be generous. No one, individual or business, wants to be called a Scrooge.  But there can be a downside to being “too nice.”  I am not advocating that you stop treating people fairly.  I just ask you to think about the situation below, how you behave and how it might be eating away at your profit.

Nip Bad Employee Behavior in the Bud

Overlooking employee “misbehavior” is a costly way to “nice” yourself out of business.  Excessive time on the phone, sneaking food, taking products home, or having a negative attitude – all of these behaviors can be costly in terms of productivity and profit.  In a smaller company, often with no HR person to be the “heavy” and where you may well be dealing with relatives, you may hate to have to warn and potentially fire employees.   But chances are the other employees are well aware of the situation and tired of picking up the slack for the problem employee.  Dealing with the situation will benefit your small business in the long run.

Avoid Project Creep

Especially if you are in a service business, you may bid on a project, set the price and parameters, and still the client comes back and says, “Can you change this one little thing”?  While you do not want to “nickel and dime” people, if you constantly give your time away free, you will cut into your profits.  Try to think of the concept of “ lost opportunity” – what else could you have done  if you were not giving your time away free or doing tasks you could delegate to someone else?  Would it have been of more benefit to the business? There is no magic answer.  You have to decide for yourself when to draw “the line.”

I’d love to hear your thoughts. Do you have examples of when you have been overly nice?