Robert Kiyosaki, writer of Rich Dad Poor Dad, often comments on the importance of balance sheets as a business management tool. Just like a yearly checkup at the doctor’s, your company’s balance sheets help you determine whether you’re in prime financial health or if you have “financial cancer.”
Most individuals understand their profit & loss/income statement very well, but many people struggle with the balance sheet. Never be embarrassed by your numbers! You may “feel in your gut” how your company is doing, but you also need to listen to the story your financial reports are telling you.
What a Balance Sheet Shows
At Ten Key, Inc., we believe that the balance sheet is the most important financial report a company can have.
Why is this?
An income statement/ profit & loss report shows you how much money you’re bringing in, and how much is going out.
A balance sheet shows exactly what a person or company does with their profits or losses over time.
This is important, because when you understand your balance sheet, you are armed with the information that will help you manage the cash flow, profits, and tax liability of your company.
Profits and Losses
When you have profits, you have the ability to grow your assets and shrink your liabilities. When you have losses, unfortunately, you’re in a situation where you’re growing your liabilities and shrinking your assets. This means you’ll have to dip into a line of credit, secure lending, etc, for your business to survive. That’s not the long-term solution we want for our clients.
Your goal, as a company owner, is to shrink liabilities and grow assets in tandem. The balance sheet is your tool to do this, and if you focus on this plan, you will continue to stay in business.
That’s why we make sure to clean up our clients’ balance sheet thoroughly. The best, most seasoned CPAs use it for tax purposes, and bankers use it as their basis for lending–much more than they use the profit & loss statement.
Good, clean books will arm your company with powerful knowledge. Call us to clean up your balance sheet, and keep your company financially healthy for years to come!