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.

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