A Balance Sheet Is Like An Altimeter

Sounds exaggerated? It’s not far from the truth.

A faulty balance sheet causes real problems for your business, just like a faulty altimeter can bring down a plane. Here’s why you need to understand and manage yours. (I’m not an accountant, so get professional advice before making significant changes!)

Your instrument panel

A pilot relies heavily on the instrument panel to know how the plane is flying. A business owner needs one too, to know how the business is flying. Or crashing.

First you need a good, accurate set of instruments. Then you need to check them regularly.

In my experience, owners don’t look at their financials often enough. Often they’re not up to date or accurate. And when owners do look, they focus on the profit and loss and ignore the balance sheet.

It sends the business off track. Or into a crash nobody saw coming.

What a balance sheet is

A balance sheet shows your assets, liabilities and equity at a point in time. It’s a snapshot of your financial position, and of your business’s financial health.

And it should always balance. That’s where the name comes from. Assets equal liabilities plus equity. Any imbalance leads to problems.

What a faulty one costs you

• Wrong financial decisions, like investing in a project you can’t afford.
• Regulatory problems, like breaching financial reporting requirements.
• Lost confidence from investors, partners and buyers, right when you want to raise funds or sell.

Avoiding that takes proper bookkeeping and accounting. Often it takes a qualified accountant or bookkeeper too.

Five things a very good balance sheet includes

1. Accurate and complete information on your assets, liabilities and equity, so it gives a true and fair view of your financial position.
2. A detailed breakdown of assets, current and non-current, so you can see what the business owns and what it’s worth.
3. A clear presentation of liabilities, current and long-term. Investors, buyers and other stakeholders use it to judge your solvency and risk.
4. Owners’ equity: share capital, retained earnings and any other equity. It shows how much of the business is owned and how much is funded by debt.
5. A comparison over time, so investors and buyers can see how your assets, liabilities and equity have changed, and judge your performance and stability.

Read it with your P&L

Your balance sheet and your profit and loss statement are closely linked. The P&L shows revenue and expenses over a period. The balance sheet shows your position at a point in time.

Read together, they help you avoid financial obstacles, grow the business, use spare cash wisely and keep the business running safely.

Understand both and you’ll make better decisions and plan for growth. And when it’s time to sell, or bring in investors or partners, clean, up-to-date financials are CRITICAL.

So make sure your balance sheet is accurate, up to date and balanced. And talk to a professional when you need to.