#12: UNDERSTAND THE MEAT OF YOUR BALANCE SHEET

Are you an entrepreneur who gets a little frustrated and confused when it comes to understanding your financial statements? You are not alone and this episode is for you!

In this episode, I’ll dive into the balance sheet in a similar way that I explained the profit & loss statement in episode 11. I compare the balance sheet and P&L and emphasize the differences. 

Key Points:

·         Money Mindset around business finances and life challenges

·         Balance Sheet components and overview

·         Relevance of the balance sheet in your business

·         The relationship between the balance sheet and the P&L statement

·         Clearing up misconceptions/misunderstandings when it comes to these reports

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Reach out at support@financiallyadjusted.com with any questions you’d like answered in future Q&A episodes!

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QuickBooks Online is my go-to accounting software. Get the best discount possible (30% off for 12 months) when you buy with my affiliate link below, through Complete Business Group. Message me at support@financiallyadjusted.com with any questions regarding signing up.
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Disclaimer: This content is for educational and informational purposes only. Please consult with an accounting professional for direct advice based on your specific business situation.

Transcript

Hello there amazing entrepreneur and thank you for tuning in today. This is Leslie Roth here with financially adjusted…You know it's the end of May here in Pennsylvania when I'm recording this it's probably coming out at the end of July. But we're just starting into, nice weather in Pennsylvania, so for me that means getting out with my husband on my mountain bike in the woods. We absolutely love being in the woods either hiking or biking. But we went mountain biking this past weekend and…I really as I was…challenging myself to tackle this new trail.

 I really realized…that mountain biking is such a metaphor for a life and for anything else that I challenged myself to do. So, years ago I started mountain biking loved it but I had this terrible crash and I just sort of stopped. I just was scared and stepped back and just never got back into it even though I knew I loved it. So, over the last year and a half I've been getting back into it and really pushing myself and challenging myself. And I have gotten to the point where I am absolutely in love with it again, but I have to really get into a mental state of challenging myself because I'm always capable of doing more than I initially think I am.

So, this past weekend, my husband and I went on this trail that we've hiked before, and I always thought oh my gosh I'll never mountain bike this. And I pushed myself to do it. Yeah, I fell down a few times had a couple crashes and have some brew to show for it. But the confidence I gained and the fun that I had just far surpassed any fear I had in the beginning, and I really think you can translate this and compare to anything you're doing in your life that you're hesitant to do out of fear or some other reason you know maybe you fell and you're having a hard time picking yourself back up metaphorically and whatever that looks like for you, you can translate that also into finances If you have always thought of yourself as some who's not that great with finances you're not a numbers person. Or that side of your business really challenges you and you find yourself avoiding it. I think it's important to realize that We often build things up in our heads a lot more than they need to be. I mean we make a bigger deal sometimes in our heads about something. And then when we actually decide I'm going to try to face this and tackle this. We usually leave the situation feeling like “oh wow that wasn't as big of a deal as I made it out to be”. And I found that that's true for myself in a number of different areas of my life. But I challenge you to examine, whether that's your finances or another bit of your business or your life, challenge yourself to just try Just set out in motion. Take action whether it's imperfect or not, you need to take action to gain clarity no matter what it is in your life. So, if you can just build upon little actions here and there. You will be amazed at how far you will come. If you're somebody who isn't that great with finances right now, a year from now you could be looking at your business finances and just feel confident and feel sure of yourself in understanding what it looks like. And you may not be able to visualize that now but trust me if you keep plugging in and keep learning about your finances just building on that skill and coming back to things that are challenging you, you’ll thank yourself later and you will see huge difference in your confidence and the clarity you have around business decisions. And that trickles over into other of your business and your life as well. So, I just wanted to share that with you because mountain biking is something that has really allowed me to gain confidence in other areas of my life. Because it's a skill that I've really built upon and had fear around even though I wanted to do it. And I'm so thankful that I did. It just pushes me to do that in other areas of my life. Like for instance this podcast you're listening to. I never in a million years would have thought that I would have set out to do my own podcast have my own business or do any of this. So, I'm here challenging myself, and I love that you're here challenging yourself alongside me.

But know that I'm supporting you. I get that not everybody is super excited about learning about finances and maybe it's something that you don't feel necessarily fearful towards but you just haven't had the time to dedicate and so you feel like you're in the dark for that reason versus a fear reason or real dislike of it. No matter what your reason is for not being clear on your finances right now, I know that everybody has their own challenges including me and I'm here in a struggle with you. We're on this entrepreneurial journey together, which just makes it so much more doable and I love that.

In my last episode I went over the profit and loss statement, what it is how it's structured how it functions and the type of profit and loss I recommend running and why. Definitely go and give that one a listen It's my last episode which is number eleven. So, if you haven't done that already go ahead and give that a listen. Because it's helpful to have listened to that first before today's episode.

Today's episode is also going to be incredibly valuable because I'm about the balance sheet and I'll explain it in a way that I did the P and L. It's so important as a business owner that you have an understanding of these two financial statements. And that you analyze yours on a monthly basis, quarterly at a minimum. Without further ado let's jump right into it.

The balance sheet is probably the most misunderstood financial statement and the most disregarded. However, it's important to understand and know how it relates to your business so that you can have a better big picture understanding of your business health. It's also helpful to understand how the balance sheet and profit and loss statement relate to one another. For entrepreneurs that DIY their bookkeeping it's especially important to gain a solid understanding of the makeup of these reports. The accounts that make up a balance sheet are ones that accumulate over time and at the time that they are run represent the accumulated balance up to that point in time. The balance sheet is made up of assets which are what you own, liabilities which are what you owe, and equity which is the net worth in your business. The way these accounts relate to one another is that assets equal liabilities plus equities. That's what they call the accounting equation. But don't be scared We aren't getting into some deep level accounting conversation.

I just wanted to give you an overview of that. You can also look at this as net worth, which is also known as equity, net worth is equal to assets minus liabilities. So, your net worth or your equity in the business is what you own minus what you owe. Of course, if you owe more in debt than what you own you'll have a negative net worth and you own more assets than what you owe in debts you'll have a positive net worth. And since I talked about the profit and loss statement in the last episode, I'd like to take some time to compare the profit and loss and balance sheet in terms of time. In terms of time periods that they're run, the P and L is a measure of revenue and expenses during a specific period of time. For instance, if you run a P and L for the month of January, you get revenue and expenses just for January first to January thirty first. Now if you run a balance sheet for January you are getting accumulated totals for those accounts from when you started your business up to the end of January. Assets can represent your bank accounts, fixed assets like buildings or equipment and accounts receivable, which is money you are owed from services or products you provided.

If you run your balance sheet up to January thirty first the total on that report will reflect the total bank balance at the end of January The total amount of fixed assets left that haven't been depreciated…and the total that's owed to you by customers up to the end of January. For liabilities or debts, the balance would be the amount of debt you owe up to the end of January. And lastly the equity section would reflect your total stake in the business as the owner at the end of January. Rather what the value of the business is at that point in time. Some people out there even call the balance sheet the net worth statement or equity statement For this reason.

Equity includes money you put in money taken out, well as any losses carried over from prior years and money retained in the business from profit from prior years. In comparison to the balance sheet, The profit and loss statement starts over during the next time period. So if you run a profit and loss for February, the revenue and expenses would reflect just February. However on the balance sheet those accounts would reflect the balances that were there from…

thirty first plus any changes to those accounts from February. Hopefully that puts those reports into perspective a little bit more for you. Now if you're about to fall asleep, stick with me here. Let's face it Some of you are probably getting bored right now I do realize that not everyone likes to talk about this stuff or hear about it like I do but I promise you that if you hang with me here it'll be worth it. And this is one of those episodes you can come back to…to digest…a little bit more because I know it's a lot to bite off in one sitting.

If you can gain an understanding of your business's financial statements though it will be one of the most valuable financial…foundational skills you can learn as a business owner you will amaze yourself with the insight it gives you as you take the time to learn it. Next we're gonna talk about the P and L again. What I'm talking about is something I saved for this episode versus the last one which was all about the P and L because it helped if you learned a little about both statements first. For business owners the P and L tends to get a little more tension because the main thing you wanna know is whether or not you were profitable. Sometimes the idea of profit can trip people up.

When business owners think profit they sometimes equate that to the cash that's available and left over for them in their bank account at the end of the month or whatever time period you're looking at. It's easy to make that assumption…

as a business owner If you haven't been caught how these reports work and flow together. It can be really confusing as a concept and I'm going to attempt to explain this in a way that might help clear it up for you today. Let's say you're writing out a simple budget. In that budget you would have revenue coming in for the month and all the bills or expenses that you owe that month. Plus any money you take from the business personally and any money that went towards paying down loan payments…or paying toward loan payments.

This is all pretty straightforward and is the whole make sure of what came in, what went out and what's left over. What happens a lot of times is the profit and loss statement is thought about as if it were operating like a budget. If you're looking at what's left over in your budget after all the money float in and all the money flowed out. This would likely be a very close match to what's sitting there in your bank account. In contrast the profit and loss statement does not reflect the same outflow as that budget did.

The difference is that the profit and loss statement doesn't include the outflow of money that was taken in owner's draws or the principal portion of loan and credit card payments. This is one of the biggest mistakes I see happening with business owners who are DIYing their bookkeeping. It seems like logically you'd put that whole loan payment and that payment to yourself as expenses like you did with the budget. However, the principal portion of the loan and credit card payment are applied to the debt, which is a balance sheet account. And the owner's draw that you took is considered a lowering of your equity in the business.

Equity is also a balance sheet account. So in reality the P and L statement and balance sheet combined make up the figures you had in your budget that we talked about before. This means that the net profit you see in your P and L…

is not yet taking into account the money you paid yourself as the owner in the form of draws or that portion of your loan payment that went towards principle. The net profit amount you see on your P and L is what you will pay taxes on. But it's not what's sitting in your bank account left over at the end of the month. From here on out when you're looking at your P and L statement, keep this in mind. Also I of course need to talk about budgeting one more time So here it goes.

Having a budget does simplify things And help you when you're planning in your business. And you want the whole picture…By understanding your budget, then looking where this money landed in the two statements we talked about, this will really help you gain an understanding the reports…and where your money is going. So each month it's important to check-in with your budget at least a few times so you can properly evaluate…the facts of where that money went from your statements. Another statement that can help tie together the P and L and balance sheet is the cash flow statement. This simply reflects the amount of cash that came into the company the total amount and the amount that went out during that time period and whether it increase or decrease from the beginning of the period.

So cash can enter your business in the form of revenue. As well as equity contributions or loan disbursements…

So this doesn't just mean on the sales you made. Is taking into account all of the cash that came into your business. No matter in which way.

I'm not going to go any further with this today. But I just wanted to touch on that and give you a brief little overview of what that statement is and what it helps you to see. But if you can have a decent under standing of the balance sheet and the P and L, you'll be in great shape as business owner.

If you haven't learned about Your financial reports any deeper than surface level before. Don't feel bad or ashamed. This isn't something many business owners know because they started a business,

Most entrepreneurs never had business classes or learned about any of this. You all just have an amazing skill service product art, We felt passionate about sharing with the world And that's freaking amazing. And I'm impressed with you even if I don't know you To have that kind courage to start our business is no small thing and don't forget that. Now let me end this episode by saying that I don't expect that many people will have some deep accountant level understanding…I would never expect that from any business owner unless counting and bookkeeping is something you enjoy and you're someone who does dive a little bit deeper because of that. If you are DIYing your book keeping though It's important to go a little bit deeper with your understanding.

And get into learning simple keeping concepts many times you don't know what you don't know. There are things you won't know how to do the book simply because you are never trained or introduced to how that works. I will be getting a little deeper into teaching DIY bookkeeping down the road. So definitely stay tuned for that. Um

but the average Business owner is absolutely capable of learning the basics of these reports enough to understand them when they generate them from their accounting software. Or get them from their outsourced bookkeeper.

you are capable and you absolutely should…

get a little deeper in understanding these because it will empower you so much in your business and equip you with the knowledge that will help you be more strategic and successful…and plan longer term in your business and your life. It's just like learning any other new skill. You put the reps in and over time you get stronger, better, and more comfortable with this. Don't put the pressure on yourself to learn and be good at this right away. It's just like that mountain biking example I talked about in the beginning of the episode.

Like you have to build any new skill over time, and that requires…patience and grace with yourself. And the commitment to showing up and taking imperfect action…

It takes time and it takes practice to learn about finances and about reports. So it's an unrealistic…expectation to put on yourself that you would just know or should know what all of this means. Also I just wanna say that if you're a seasoned entrepreneur and you're beating yourself up over not learning this sooner. Just stop it That's not going to serve you and there's nothing you can do about the past. Just commend yourself for stepping forward in this now and for tuning into this episode.

If you're still listening, props to you and I'm glad I didn't bore you to drop with this topic. If you have questions about these two statements please reach out and ask me at support at financially adjust dot com Or if this helped you understand these reports better I would absolutely love to hear about too. My goal here is to empower more entrepreneurs with this financial foundational knowledge and help you strengthen your skills as a business owner.

This stuff isn't always easy, but it's important to your business health and worth plugging into.