Everyone has an idea about how the balance sheet works, but only a few know how to incorporate this knowledge into better managing their businesses.
At a glance, analyzing the balance sheet looks as if the accountant is just determining whether your capital versus cost and expense match.
In reality, whether the computation involves large-scale profiles such as community and business mortgage loans or small ones like short term personal loans, looking into the relationships of how the expenditures and ROIs work grants you a complete overview of your financial standing.
When looking at the balance sheet, it’s important to acknowledge that each line and area of the report will translate to specific key metrics in your business. Below are the things you have to pay attention to:
- Bank Money – take this as your business’ life. If you run short on the total deposit for fulfillment at any given repayment period, the payroll and utility bills will be compromised.
- Accounts Receivable (A/R) – the fruit of labor, but not everything. The gross profit you receive from selling a product or providing a service will be deducted from the cost of the investment you made.
- Accounts Payable (A/C) – creditable debts. It’s a great benefit to advance payment, especially if the return on investment is bigger than what you’re going to incur.
- Inventory: this supersedes all the tools involved in the business. Align the inventories against your expected production capacity to ensure continuous operations.
- Fixed Assets – the building, vehicle, and equipment. These fixed assets should be secured in a 12-month period.
- Taxes – government’s body. Keep in mind that every business has the obligation to pay their dues to the government to avoid liability and regulatory issues.
- Loans – short and long-term debts. Make sure all loans are scheduled for repayment, either via postdated checks or personal transfers.
For a regular accountant, the balance sheet is nothing but the segmentation of a business value. When it comes to profitability, only you can decide what to do.