Operating a small business takes more than merely stocking inventory and making sales. As any entrepreneur learns, a myriad of responsibilities exist that support the management of the enterprise.
One such element is a business’s balance sheet. Simply put, a balance sheet demonstrates whether a company is gaining profitability. It does so by subtracting the entity’s liabilities from its assets. That final number indicates whether the company is profitable or not. A balance sheet also helps the owner quickly recognize whether they are over-investing in the enterprise (liabilities). If that figure is higher than the value of the company’s assets, the final number will be a negative, and that’s not a good sign.
According to Michael Loffa, a retired executive from Columbus who spent more than 30 years in the insurance industry, a balance sheet is one of three financial statements crucial to the running of a company. The other two are the income statement and a statement of cash flow.
Loffa, who now volunteers his expertise with SCORE Columbus, an advisory group comprised of retired business experts, says a balance sheet is less important at the onset of a business but gains importance as it grows, and hopefully, succeeds.
“Appreciating a balance sheet is evolutionary to the small business owner. At first, they just want to see what’s in the bank at the end of the day. But, as a business ages and grows, the balance sheet gains importance as affairs become more complex. A balance sheet is the way to understand the value of the business and whether the owner’s equity in the business is growing,” says Loffa.
When the need for a balance sheet finally arrives, a business owner interested in overseeing the minutia can create one their self, perhaps by the use of a computer program like Quicken, or they can hire an accountant.
“Even if you aren’t interested in creating the balance sheet, you still need them,” says Loffa.
While reviewing a balance sheet, and responding to its revelations accordingly is intrinsic to an entity’s viability, Loffa says most company owners can get by with looking at them only on a quarterly basis, if an accountant prepares them. Of course, if the owner is handling this aspect of the business, they should be updating the document on a consistent basis.
“Cash flow is more pressing in everyday business,” he says.
Not only does a balance sheet serve to provide a quick overview of a company’s health, they are usually imperative when a business seeks to secure a bank loan.
“If you borrow money from a bank, it is very likely you will need to provide balance sheets. It is important to have and understand what they say to communicate with bankers,” suggests Loffa.
“If you don’t keep track of your level of investment, you can’t tell if you are generating enough income,” he says.
Tami Kamin Meyer is an Ohio attorney and writer who chairs the marketing committee of the American Society of Journalists and Authors.