# The Balance Sheet, Unlock its power within your small business. By Jessica Reagan Salzman Professional Bookkeeper

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1 The Balance Sheet, Demystified Unlock its power within your small business. By Jessica Reagan Salzman Professional Bookkeeper

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4 Where to Start What is the Balance Sheet? The Balance Sheet highlights the financial condition of a company. It offers a snapshot of a company s health. It might help to think of your company s Balance Sheet as the running scorecard for your business. It shows the financial condition of the business as of the day you create the report. The formula for the Balance Sheet is: Assets = Liabilities + Equity The top half of the Balance Sheet lists the assets. The bottom half lists the liabilities and equity (equity is also called capital). To help us better understand the Balance Sheet; let s look at it this way: Assets = Liabilities + Equity or Assets are happy things that your company owns. Liabilities are sad debts to others. Equity is the difference between the two. The difference between the two is either a happy or sad remaining balance. Let s take a look at a company s Balance Sheet and see if the above makes sense.

9 THE RATIOS and FORMULA What How to Calculate What It Means Measures solvency: Tells us the number of dollars in Current Assets for every \$1 in Current Liabilities. Current Ratio Current Assets Current Liabilities For example: a Current Ratio of 1.95 means that for every \$1 of Current Liabilities, the business has \$1.95 in Current Assets with which to pay the liabilities. Measures liquidity: Tells us the number of dollars in Cash and Accounts Receivable for every \$1 in Current Liabilities. Quick Ratio Working Capital Formula Cash + Accounts Receivable Current Liabilities Current Assets Current Liabilities = Working Capital For example: a Quick Ratio of 1.79 means that for every \$1 of Current Liabilities, the business has \$1.79 in Cash and Accounts Receivable with which to pay the liabilities. Note: For businesses with only Cash and Accounts Receivable as Current Assets; Current Ratio and Quick Ratio will be the same. Measures both the company s efficiency and its short-term financial health. For example: if the company has more Current Assets than Current Liabilities, the company has sufficient Working Capital.

13 Working Capital is similar to the Quick Ratio. Positive Working Capital indicates that the company is able to pay off its short-term liabilities. It is important to pay attention to Working Capital because if it dips too low, the business risks running out of cash. Even a very profitable business can run into trouble if it loses its ability to meet short-term payment obligations. However, having too large a balance in Working Capital can be an issue as well, especially if most of the Working Capital is tied up in Accounts Receivable. Case Study When I first met Patrick, he was having a hard time running his business. He knew he was making a profit, so he was very confused by his constant struggle to pay bills, pay himself, and have cash in the bank. It quickly became apparent that issues with his company s Working Capital were contributing to Patrick s problem. His company s Accounts Receivable balance was very large because he allowed his clients to pay on terms and most were taking between 30 and 60 days to pay. This means his clients were getting his services without paying very soon thereafter; meaning Patrick had earned the revenues but didn t have them in cash. In addition, his company s Accounts Payable balance was very small. Patrick always paid his vendors on time and often as soon as he received their bill. He wanted to show his vendors that he cared greatly for their services and did so by paying right away. Sometimes he even paid for services in advance. This means his vendors were being paid very quickly or upfront while he was waiting to be paid by his own clients. By understanding and applying interpretations of ideal Working Capital conditions, I have assisted Patrick in running his business so he no longer struggles with the challenges he experienced before utilizing my service.

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