What’s a balance sheet?
Have you ever thought when viewing the receipt from your ATM transaction: “Wow, where did all that extra money come from? What can I do with it?” I still recall the first time my daughter said that to me after she got some cash out of her account. I had to explain that it was for that moment in time. Did she have outstanding checks that had yet to clear her account? Yes, she answered as her face fell.
That is how a balance sheet works. It’s a snapshot in time of what you own and what you owe. On the left side are Assets—the things that you own. On the right side are Liabilities—what you owe. When you subtract your Liabilities from your Assets, what is left is what you really own.
Assets – Liabilities = Net worth
Much of what makes up that number may not be in cash (liquid assets). It may be inventory for future sales; accounts receivable (what people owe you for goods and services you have provided); real estate if you own the building in your company name. It is what is left over after paying everyone, sometimes referred to as owner or stockholder equity.
A companion piece to the Balance Sheet is the Income Statement. It shows what happened with all that cash that flowed through your hands. Starting at the top, you’ll have Sales Revenue (what you got paid for what you sold). Next is usually Cost of Goods and Returns. Whatever you use in your business has to be recognized as a cost to acquire revenue. This could be marketing dollars or sales commission dollars. A current example is how major advertisers are evaluating their cost of media—traditional print and TV vs. digital and social media that targets their specific demographic. This is a major shift in focus but it all goes on the income statement. After you recognize the “cost of goods sold” you subtract this from your sales revenue and you get a term often called gross profit margin. Sometimes you hear gross profit and sometimes just margin.
But wait, you’re not done yet. Next you’ll see a line item called G & A (General and Administrative). These are things like payroll for staff, insurance, rent, repairs for equipment, etc. All those expenses must be paid to keep the doors open.
This leaves Profit Before Taxes. There may be an extraordinary expense or something that is non-recurring that would be addressed here. It is beyond the scope of this article to address cash vs accrual accounting. However, there’s an important term you hear a lot in business: EBITDA.
I=Interest (on loans outstanding)
D=Depreciation of Assets
A= Amortization of loans
In American Fathers, Victor, Sasha’s father, recommends he use Profit Picture to help visualize the financial situation in the company he works for and for his new company. (www.profitpicture.net)
Profit Picture® automates your spreadsheets and creates a “picture” or visual representation of what your spreadsheets are telling you. You are able to see trends, both positive and negative, in just seconds. As a business owner, you are seeing real time actionable business intelligence instead of waiting for weeks to find out how you are doing.
Some examples of what Profit Picture can do are:
- Red Flag Report: This dashboard answers how soon your job in progress may be going off track. No waiting till the end of the work to see if you are going to make money or lose money as would be shown in your income statement after the fact.
- Gross Margin Trends: This visual indicates which products or services are contributing to your profit. Usually you have to wait 30-45 days or maybe even sixty for your income statement to provide information that Profit Picture can show you at the speed of your internet. Additionally, this report shows “trends” and not just a snapshot in time.
- Momentum: This one gives you trend reports over date ranges you specify with the click of a mouse. We have been told this saves hours of staff time to create this type of summary report.
- Revenue to Profit: This report show four key data points that help you see how your company (or division) is doing relative to goals, to the past, and profits relative to prior periods. It also contains a feature that shows you what’s in the pipeline for help in developing projections. This is not something you would receive in your accounting statements.
You can sample a video of each of these at www.profitpicture.net
Victor understood the value of intelligence from his prior life. He knows how to apply it to his business today and wanted Sasha to have all the advantages that timely, accurate, and clear information can provide.
Ron Schutz, Author