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Balance Sheets: The Key To Staying On The Business Tightrope
Sun 24th July 2011
Yet, in spite of the fragility of so many small businesses, in spite of the balance between risk and reward, there's one aspect of the enterprise common to all companies which is often paid less attention than it deserves: finance. That's not to say that its importance isn't recognised -every one of us is more than aware of just how essential it is to have enough money - but that financial management is often shied away from by entrepreneurs who have no expertise in that area.
It's tempting to ask why, given the fine tightrope that the small business manager has to walk. But that's an easy enough question to answer. A fear often pervades that finance is only the preserve of specialists, an intricate and impenetrable world of technical language and complex maths. Yet this simply isn't true - basic yet effective financial management can be within the reach of everyone; it doesn't call for technical knowledge, and certainly has no need for any maths beyond basic arithmetic, additions and subtractions.
And the core of this basic financial management is the balance sheet, the straightforward tool that helps you to see just where your business is now, where it has been and where you can expect it to go in future. It's not complicated to create one - which, in essence, is why taking on that bit of financial management isn't complicated either.
So, what goes into a balance sheet? There are two sides to it: assets, which account for everything that your business owns or is owed at a moment in time; and liabilities, everything that your business owes to others at that point. We'll look at assets first, the good news.
This is divided up two ways as well. On the one hand, you have your organisation's fixed assets: the value (a current, resale value, not the original cost) of any land, buildings, technology, machinery, fixtures and fittings the company has, plus long-term investments and intellectual property rights such as patents and copyrights. On the other hand, the organisation also has current assets: including cash in hand and in the bank, stock, shorter-term investments and money owed by customers. Your fixed assets are those that the business can rely on as being the same over a lengthy period of time, whereas current assets fluctuate, often on a day-to-day basis.
Liabilities split in much the same fashion. There are long-term liabilities, which can include debts to be repaid more than a year in advance, and shared capital and retained profits, less either capital invested in the business or dividends (where relevant). And loans of a shorter duration are included in current liabilities, along with money owing to suppliers and taxes.
And when you deduct the liabilities from the assets, there's your balance. The difference - should there be one - is the net worth of your business.
This shouldn't be confused with a profit/loss sheet, which shows how much money the company makes (revenues - expenses) over a defined period of time, but is rather a snapshot of just where the business is, and how financially healthy it is, at the instant in question.
This vital yet straightforward tool can help you to understand your company's present, and in doing so, build more effectively for the future; it would certainly be worth considering a short training course in basic financial management to get to grips with balance sheets and other key skills. You'll soon find that keeping balances will keep your business safely on the tightrope, and moving on to success.
Author is a freelance copywriter. For more information on finance for non financial managers london, please visit https://www.stl-training.co.uk
Original article appears here:
https://www.stl-training.co.uk/article-1820-balance-sheets-key-staying-on-business-tightrope.html
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