SMALL BUSINESS FINANCE 1: BALANCE SHEET 1

If you are a proprietor of or a partner in a small business (especially a home business) and your business has not grown to a point where you actually need an accountant, you can construct financial statements for your business on your own to find out what your business is really worth.

Let’s start with the Balance Sheet. It looks like this:

The first thing you have to be careful about is to make sure that you don’t mix up your personal finances (please see previous posts on personal financial statements).

ASSETS

1 CASH. Allocate Cash for your business and separate it from your personal Cash. If possible open a separate bank account into which you will deposit all incoming funds and from which you will pay out all disbursements.

2 CASH EQUIVALENTS OR NEAR CASH / SHORT TERM INVESTMENTS. If you start generating oodles of cash from your business, don’t let it lie idle in a checking account. Place it in a time deposit (e.g., 30 / 60 / 90 /etc days). Keep it separated from your personal cash. If you need it for your personal expenses, record it as a withdrawal from the business’ Cash and a Drawing from the business’ Equity.

3 ACCOUNTS RECEIVABLE. One way of growing your business is to extend credit to customers. However, be sure they are reliable and will pay on due date.

4 ALLOWANCE FOR BAD DEBTS or DOUBTFUL ACCOUNTS. If you happen to extend credit to somebody unreliable (e.g., has not been able to pay for as long as 90 days or more), take the amount out of ACCOUNTS RECEIVABLE and record it as an allowance in the Balance Sheet and as an EXPENSE in the Income Statement (how to construct a Small Business Income Statement will be discussed in later posts).

5 INVENTORIES. In this account, list the cost of all goods (not the selling price) already produced and ready for sale.

6 PREPAID EXPENSES or SUPPLIES. Into this account goes payments of expenses in advance (e.g., insurance) and supplies not yet consumed (e.g., raw materials not yet turned into finished products).

When you’re already making oodles of money:

7 LONG TERM INVESTMENTS. Consider placing your surplus cash in long term financial instruments (bonds, stocks, etc). Some bonds (held for 5 or more years) are tax-free.

8 LAND / BUILDING. Consider owning your own place of business.

9 FURNITURE & FIXTURES / EQUIPMENT. Consider improving your business premises (impressive reception area, customers’ lounge, etc) and upgrading your equipment.

10 ACCUMULATED DEPRECIATION. Depreciation can be a useful tax shield, depending on the treatment (please refer to UNDERSTANDING ACCOUNTING TALK 8: Balance Sheet Assets).

11 INTANGIBLE ASSETS. Spend some of your surplus cash in building a brand name (catchy & memorable corporate / product logo, mascot, high profile endorser, etc). More in UNDERSTANDING ACCOUNT TALK 9: Noncurrent Assets.

LIABILITIES & EQUITY will be discussed in the next post.