As we start 2012 this is a good time to reflect on past accomplishments, future endeavors, and failures.
Failures can build or weaken a business depending on the step taken immediately following the mishap. One important step is to begin a concise review analyzing why the failure happened and what tools are needed to prevent or minimize adverse events.
All businesses should have monthly or at least quarterly financial statements prepared and reviewed on a regular basis. Waiting to prepare financial statements at the end of the year is not a good business practice. Financial statements consist of two main statements: Balance sheet and income statement (profit and loss).
Most business owners do not review their balance sheet. This report contains information the small business owner should review before buying equipment, hiring employees, expanding the customer base, extending credit or advertising. The statement provides a snapshot of the business’s financial status or health. It documents assets, liabilities, and owner’s equity transactions a business will have on a daily basis.
Assets of a business are best described as items or things the business owns. These items include cash, equipment, land, inventory, accounts receivable, patents and vehicles (this is not an all-inclusive list). Assets are the first items appearing on the balance sheet in the order of most liquid. The term liquid or liquidity means the quickness of converting the asset to cash.
Liabilities are the next items listed on the balance sheet. Liabilities represent the debt of the business. Liabilities can be informal or formal claims. A written contract such as a promissory note is considered a formal claim. An informal claim will be items purchased from a vendor with a verbal agreement to pay at a later date. Liabilities also represent how much of the business creditors own. Examples of liabilities are accounts payable, taxes payable, salaries/wages payable, notes payable and interest payable.
The final item on the balance sheet exhibits the ownership interest of the owner, known as owner’s equity or net worth. Net worth is increased by cash injections made by the owner and profits of the business (net income). It is decreased by cash withdrawals and expenses of the business (net loss).
Once the balance sheet is prepared, a comparison against previous balance sheets should be conducted. If from one period to the next net worth or sales decreases or expenses increase dramatically, there may be a problem that will warrant further review.
I want to take this time to thank the many individuals who have benefited from this monthly column. I pray everyone will be blessed and have an awesome year.
Sandra Taylor-Sawyer is director of the Small Business Development Center at Clovis Community College. Call the center at 769-4136 or visit www.nmsbdc.org/clovis