This month is all about self-care here at 4 Corners CFO. With the end of the school year, there is a massive adjustment to schedules and priorities. It is a great time to revisit personal and business goals and ensure you care for yourself and your business. Ensuring the financial health of your business is a form of self-care. Money worries are one of the most stressful things to deal with in life, so having a stable financial situation creates peace and ease in all areas of life. The balance sheet is the foundation of a healthy business and the best place to start with financial health.
A Solid Financial Foundation is Self Care
Business owners might be accustomed to the ebb and flow of money into their business, but ultimately our goal is to create stability. Stable finances eliminate sleepless nights, a constant feast/famine mindset, and the looming potential of business failure. Financial planning gives the gift of business longevity and financial peace of mind!
The Balance Sheet is the Foundation of a Business
The business balance sheet is the foundation of a successful business. It is a statement of the company’s assets, liabilities, and equity at a specific time. Some examples:
- Assets: cash, inventory, machinery, property
- Liabilities: accounts payable, loans, taxes, customer prepayments/deposits, accrued expenses
- Equity: retained earnings
The balance sheet provides information on a company’s financial health analysis:
- Amount of debt compared to equity
- How liquid the business is in the upcoming year
- Amount of tangible assets and the amount that comes from financial transactions
- Timeline for receiving outstanding payments from customers
You need to reconcile the balance sheet to maintain a working knowledge of the business finances. This means reconciling credit card transactions, accounts payable, accounts receivable, payroll, fixed assets, subscriptions, deferred accounts, and other areas from the general ledger or balance sheet to their source or supporting file. Think about a bank reconciliation as an example. You want to be able to match your bank balance back to your balance sheet and know what has or hasn’t cleared yet.
If you cannot reconcile your balance sheet, you are not operating with the best possible knowledge about what is happening in your books compared to your bank account. A balance sheet that cannot be reconciled is either missing something in the books or an item that needs correction in the bank account.
By verifying the accuracy of the balance sheet with other forms of documentation, we can ensure the profit and loss statement shows every transaction it should. This reconciliation process is essential because the balance sheet shows incoming, outgoing, and what is on hand. If the balance sheet is not correct, then your P&L might be off as well. The P&L is the ultimate documentation of your business finance and is used to make all significant financial decisions. It needs to be correct!
Balance Sheet Dictates Longevity and Liquidity
Paying close attention to your balance sheet and P&L gives precise information that allows you to make sound financial decisions. A client came to us with a negative six-figure balance sheet. They were paying themselves from debt and had no actual income to cover those expenses. It is very noticeable when you have a negative profit, but if you are not paying attention to your balance sheet, you can overlook negative balances.
A quick note about debt: it is normal and can be a tool if there is a specific need or projected ROI. Your balance sheet allows you to manage any obligation to be used as needed in your business.
Owning a business does not have to mean constant financial worry. Taking care of your business finances is taking care of your mental health! Just like you cannot operate your business if you are burned out mentally, you can only continue if you have the financial means to make it happen. If your business finances need assistance, consider one of our focused VIP Days! We would love to help you!