Jim Schell explains the importance of understanding the balance sheet of your business
Tags:balance sheet,business tips,financial statement,hattie bryant,small business advice,small business school
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This is an excerpt from Small Business School.
Jim: Too many small business people think that their financials are sacred that nobody can see them. They're not that big a deal and their particularly not that big a deal when you’re dealing with someone that is going to in case of a large vendor say, “Tell you what, I’m going to carry you for 30 days. I give you net 30 day terms.”
Jim: Which is an effect I’m going to loan you money for 30 days. They should be allowed to see your financial.
Hattie: Of course.
Jim: So they don’t get a right technology.
Hattie: Lizzie Marlett has been Knowle Hanson CPA for over 10 years.
Lizzie: From their listing of cash receipts and cash disbursement which has some detail and were able to produce for them a balance sheet, the P and L. And that’s of importance to them. What’s more important is from that we can begin projecting out from a tax planning status where they are, what they need to do regarding salaries, whether they're going to have a tax liability, whether they're not, how do you best plan for the year, when they should do a pension plan.
Hattie: But now, Knowle can produce a balance sheet anytime.
Noel Hanson: The coolest thing about this program is the fact that I can see at the front company page everything I need to know about the health of my business right now, and I don’t have to think any further than that. I can move on and do what I like to do best which is working directly one on one with my client solving their problems.
Hattie: If someone comes to an advocate or a CPA or a banker for help than a small business owner that it come with their financials? If they’re asking for help, right?
Jim: Absolutely. Let’s go back to a basic tenant here. You cannot impact the profitability of your company without doing one of three things, increasing sales, increasing gross margin, decreasing expenses, right? How do you know where the leverage is, what needs to be done unless you can see the figures that give you the relationship between those all those figures. What’s the ratio of your current assets to your current liabilities? Do you know that number?
Hattie: I know.
Jim: You need to understand your balance sheet just as much it’s more important than your P and L. The P and L tells us where, what the results of our operations have been for the period covered, so and if I just said that financial statement should be monthly so what would be if this is March of 10th we are going to get our kick out financial that shows us what we did during the month of February, so a P and L says, how much we sold that sales, right?
Jim: The gross margin part of it. The next section is how much we made after those sales, and then the expenses are, what did it cost us to provide all the administration, and so then the bottom line which is where everybody does know that figure, right? We all know if we go to the bottom line and, “Hey, there’s our net income that’s our profitability right then that figure there.”
Well, profits what were in business for? Usually on the P and L I’m looking at a lighter cost or cost of goods especially on the P and L you can see where all your money goes. The only way you can increase your profitability is decrease your cost, and sell more product which to increase your profit. That figure the bottom line on our P and L is the figure that used to pay taxes on.
Hattie: So depressing.
Jim: But it is and this is we’ll talk about hopefully we’ll talk about cash flow. It doesn’t it is not cash it’s just the figure that we pay taxes on, but having said all that it is an important figure because taxes are important, but it’s also important because going back to the old trend thing it shows how we did in February compared to how we did in January. And hopefully we need to talk about another issue which is comparison, number comparison but it also shows us what we compare to what we did a year ago in February.
Hattie: The P and L gives us many numbers including cost of labor. Nancy Yale is the office manager at Hanson and Company and she is happy to have a new payroll tools.
Nancy Yale: Every month I seen a payroll summary outside of the office to an outside consultant who figures the taxes and everything and then sends it back to me and tells me how to fill up my little forms and send it on. There are mistakes sometimes. Now I’m able to do the whole process myself, and I may able to save the monthly expensive payment and I also can keep the control in the office where I know it’s being done right.