For newcomers to business, a balance sheet may appear at first to be a complex and confusing collection of numbers. However, this financial statement contains valuable information for assessing the health of your company and making decisions on which direction to take.
A balance sheet is like a snapshot of your company at a single moment in time. The balance sheet shows how the capital within your business is distributed over the various accounts. A surplus of assets over liabilities indicates profitability. If the statement shows more liabilities than assets, however, your company is at a loss position—not necessarily cause for alarm, depending on the longer trend. For example, a business may have a month with high expenses and a net loss that may be more than offset by five months of profitability. On the other hand, three consecutive losing months should prompt the owner to make serious decisions about how to overcome the negative cash position.
Compare balance sheets over a period of time for the big picture of your assets and liabilities. By comparing these on an item-by-item basis, you can spot trends that will affect your firm’s overall financial health. For example, larger quantities of merchandise on hand from one period to another may reflect a decision to buy ahead because of continuing inflation. Receivables may show a continuing upward trend when collection of outstanding accounts exceeds 30 days. Debts may run higher when the firm expands or makes capital improvements.
Much like the balance sheet, the profit and loss statement (or operating statement) totals the result of operations over a selected time period. This statement will show sales volume, cost incurred and the amount of profit or loss. Comparing the monthly or quarterly profit and loss statements can be revealing. Why was there a lower gross profit for several quarters? Did price cuts decrease per sale profitability? Was a higher proportion of sales spent on operating costs such as personnel, rent or insurance? Are overhead costs increasing routinely?
SCORE is a nonprofit organization having more than 35 volunteer counselors in Grand Rapids who provide free and confidential business advice to veteran entrepreneurs and those just starting out. For the Grand Rapids Chapter office of SCORE, call 1-616/771-0305, or find a counselor online at www.scoregr.org. Rockford Chamber of Commerce 1-616/866-2000.