I have prepared financial statements for business owners throughout my entire career. A standard set of financial statements can be a wealth of information when it comes to operating a successful business. Too often the value of these tools is unappreciated by the business owner. Many times, their attention goes straight to the bottom line of the Profit and Loss statement to see how much profit was made. The other statement, The Balance Sheet, gets ignored.
The Balance Sheet is in many ways the most important statement. It is here that the financial strength of the business can be determined with a little analysis. It is the statement the banks scrutinize the most to determine how credit worthy a business may be. To look at a Profit and Loss statement and ignore the Balance sheet can lead a business owner to make unsound decisions based upon an incomplete financial picture.
For example: suppose you borrowed $50,000 to start your business. In your first year you have $125,000 of income and $100,000 in expenses. If you only looked at the Profit and Loss statement, you would think the business is doing very well and would be credit worthy since it did so much business and was profitable. However, your opinion may be different if you were to look at the Balance Sheet and see that the checking account only had $2,000 in it, the owner only invested $5,000 of their own money into the business and the business was $45,000 in debt! This business does not appear to have the financial resources to pay too many bills.
Conversely, a business could experience a $25,000 loss in their first year. Simply based upon the Profit and Loss Statement they would not appear to be credit worthy at all. But if you looked at the Balance Sheet and saw that there was $15,000 in the checking account and the customers owed the business another $35,000 your opinion may be different.
If, like many others, you’ve been operating based only on your Profit & Loss Statement, feel free to give my office a call. We can help you uncover the valuable information you’ve been missing, and learn the true strength of your business.