Reading a balance sheet is an important skill that entrepreneurs should learn early on in their business says Edmonton bookkeeping. The information in a balance sheet can help entrepreneurs understand the financial state of their business, and can help them decide what they need to do to help them grow their business, and see if their business is declining, and make plans on how to avoid that. One of the three most common reasons for business failure in Canada is running out of money, and that can significantly be avoided if entrepreneurs learn how to read their balance sheets.
The information on an entrepreneur’s balance sheet should be assets of the corporation, the liabilities of the corporation and the equity in the corporation. Edmonton bookkeeping says that entrepreneurs tend to misunderstand what the equity of their business is. This comes at the end of the balance sheet and shows the entrepreneur the financial state of their business. This includes shares of the corporation, and vivid dividends paid out to all of the shareholders. This shows everything that the business owner has taken out of their corporation, essentially what they have profited from their business. This is extremely important for entrepreneurs to see, especially in relation to the assets and liabilities of the business. This can help entrepreneurs understand if they are able to take more out of their corporation, or if they cannot afford to take much out of the corporation yet.
Business owners should also understand certain terms when they are looking at their balance sheet so that they can understand what it is talking about. They will see Accounts Receivable in their balance sheet, and this will be listed under assets. Accounts Receivable tells entrepreneurs what is owed to the corporation. This gives the entrepreneur a good idea of all of the money that should be coming into the business. If an entrepreneur has done the work for a customer, and invoice them, waiting for the payments is considered the Accounts Receivable. The only reason this is good if this is an extremely high number is if all of the invoices are current. An entrepreneur should not want to see an extremely high Accounts Receivable that has been outstanding for a long time, because that means they may have trouble collecting that money. One an entrepreneur has received the money from their clients, that amount drops off the Accounts Receivable and is listed in the corporation’s assets in their cash or bank account.
Edmonton bookkeeping says that the entrepreneur should also understand what accounts payable is. This is the amount of money that a business owner owes others typically in the form of bills and invoices. Ideally, entrepreneurs will not want to see this very high either, because that means that they are either incurring a lot of bills, or they are not able to pay those bills.
By understanding all of the information that is listed in the balance sheet, entrepreneurs can start to understand how the business is doing financially. By knowing this, they can make decisions as if they need to cut expenses or increase the revenue of their business.
One of the most important things that an entrepreneur can learn early on in their business ownership says Edmonton bookkeeping is learning how to read their balance sheet. They will get this interim financial statement from their Edmonton Bookkeeping once or twice a month, and it will show an entrepreneur the financial state of their business. Because if they do not understand that, how can they make plans to succeed? Trying to set a direction for business without understanding the direction it needs to go in can be extremely difficult. If entrepreneurs do not have this important information for their business, they will not know if changes that they are making in their business is in the right direction or have the intended effect that they hope to have.
There are three things that business owners will see on their balance sheets. They should see their assets, their liabilities and the equity in their business. The assets will be listed at the top, and the order that there listed in is extremely important. Assets should be listed by what is easiest to make liquid first starting with cash, and bank accounts. Second, on the list is the Accounts Receivable of the corporation, and finally all of the things in the corporation that are material. Such as equipment, computers, vehicles even the building if the business owner owns it. A good rule of thumb for entrepreneurs when they are listing their physical assets of the business is to ensure that they are at least a thousand dollars in value, and will be able to be used in the business for the next year.
Second, on the list are all of the liabilities of the corporation, and Edmonton bookkeeping says that this essentially is everything that the corporation owes. All of the bills including credit cards, loans, payroll and taxes that businesses owe the government. Ideally, an entrepreneur would want to see their corporation having lower liabilities, and how the liabilities look compared to the assets of the corporation is important. Entrepreneurs are not going to want to see the liabilities growing from one statement to the next, because that is an indication that they are either incurring too many bills for the corporation, or they are not paying them off timely enough. Both of those can be warning signs that entrepreneurs can see in their business, they can make plans to change and avoid.
This is extremely important for entrepreneurs to learn to do and as early on their business as possible. 15% of all Canadian entrepreneurs fail in business within the first year, and 30% fail within year two. Learning how to read the balance sheet so they can make informed financial decisions to avoid running out of money in their business is extremely important, And can help entrepreneurs succeed in business.