By Hilary O’Dwyer, CEO, Titian Consulting
I want to go back to basics and look at your books and what is in them. What is the difference between your profit and loss statement; balance sheet and cashflow? I’m going to start with the balance sheet, something that is often overlooked but is the first thing that lenders ask for!
When we talk about our business, we normally talk about our profitability; revenue or cash. And they are important metrics; but they aren’t everything. Our balance sheet is a snapshot of our business on any given day. In some ways, it’s a barometer of the health and viability of our business.
What’s in a balance sheet?
In accounting terms, all your assets and liabilities are listed in there. Assets are the heroes and they are what you own. Liabilities are the villains and represent what you owe to others. Both of them are generally split into two time categories – current, which will be converted into cash in less than twelve months and non-current, which are greater than twelve months. Examples, but not an exhaustive list of what we usually see are listed below:
- Bank accounts, net of credit cards
- Accounts receivable
- Deposits on rental properties
- Prepaid expenses
- Plant and equipment
- Leasehold improvements
- Accounts payable is the big one here
- The ATO – GST; PAYG and income tax
- Super payable on salaries
- Annual leave provision
- Working capital loans
- Finance leases (used to pay for the car or equipment that you bought)
- Director’s loan account to the business owner
When the balance sheet is being assessed – by lenders or potential clients, etc., what they are looking for is assets being larger than liabilities. Simply put, this means that if we converted everything to cash straight away, we would be able to pay off all of our debts and have cash left over. Fundamentally, that’s the aim. And this cash that is left over represents the profits of the business, which is how we link the profit and loss account back to this vital document.
In bookkeeping terms, I always start with the balance sheet review for a client as it can be where things are hidden away, usually because someone didn’t know how to code it or what to do with it. If your balance sheet is all tidied up and agrees to external sources, e.g. the ATO portal and supplier statements, then your profit and loss has to be accurate as there is nowhere else for the costs etc. to go to.
Being on top of your balance sheet can save you a heap of time if you need to send it to a lender, as mentioned previously, or a prospective buyer of your business.
So, how is your balance sheet looking?