Balance Sheet….what’s a Balance Sheet?  I have never seen one of those before.

Sadly, I hear this question far too often from business owners.  And whilst it is not a surprise –  I think once you step into the role of business owner and entrepreneur – you need to be on top of what you need to know and what financial reports are important.

I am not saying you need to understand a Balance Sheet from the day you start your business (that is why a trusted advisor like me is very handy), but you need to know the financial obligations for your business and your Balance Sheet will tell you this information.

So what is a Balance Sheet exactly?

I could get all technical and talk abut future benefits and obligations of a particular transaction – but in the simplest form, a Balance Sheet shows what you own (so things like bank accounts, equipment, debtors, property, investments) and what you owe to someone else (so things like loans, accounts payable, GST, tax, superannuation).  Yes, that is a simple explanation, but if we start at the basics, then hopefully you will become more confident in using the report.

So how do the Balance Sheet and Profit and Loss report interact with each other?

In the accounting world, every transaction has two sides – think of it like a pair of scales.  One side goes up, one side goes down.  So let’s look at an example.  Let’s say you pay an accountant for some financial training (wonder where I got that example from !).  The two sides of the scales are bank account will go down as you have paid for something, and your expense account for “consulting/training” will go up.  The bank account is a Balance Sheet account, the expense account is a Profit and Loss account.

So in one transaction, both the Balance Sheet and Profit and Loss are both impacted.  So if you code something incorrectly by mistake, it could mean that both your Balance Sheet and Profit and Loss are wrong.  So if you are not looking at your Balance Sheet, how can you say your Profit numbers are accurate….as you are really only looking at half the picture.

What to look for in your Balance Sheet:

1. That you bank accounts actually reconcile.  Coding all your transactions in your cloud software is not actually reconciling the bank.  What I mean is, have you have actually compared the balance at the end of every month in your accounting software to your online bank or statements.? Verifying your data for accuracy is critical and prevents any ongoing or long term errors.
2. Equipment accounts.  Thanks to the governments limit of $20k immediate write-off for most assets, it means assets under this value purchased for your business need to be depreciated in  full in the year of purchase.  This can get tricky to do this in your software, another reason why a trusted advisor to be on call is handy.
3. Suspense accounts.  This is my worst nightmare – business owners who code things to suspense as they don’t know what to do with the transaction.  This suspense account usually sits on the Balance Sheet…so if you don’t review the Balance Sheet you forget that you have to go back and actually do something with these transactions.  What we suggest, is each month get a list of queries, and book a financial coaching session to get them sorted. Don’t let issues sit there for more than a month.
4. Wages, tax and Superannuation payable.  If you have staff, the accounting system can run a payroll for you and post transactions to a liability account for the tax, wages and superannuation you need to pay.  When you make those payments, you should be ensuring the liability accounts clear.  Make sure you are not ignoring these accounts and that the balances make sense.
5. GST.  If you are registered for GST, the GST account in your Balance Sheet gives you a running balance of what you owe to the ATO (or perhaps what they owe back to you).  This information is vital.  Often you don’t have to pay this GST for another month or two, so the Balance Sheet tells you what you need to have put aside in your savings to ensure cash flow is not impacted when the Tax Office comes calling for it’s money.

The Balance Sheet is not a scary report.  Make it your friend, and it will give you great cash flow insight into your business.  Who wouldn’t want that?