Are you getting a monthly balance sheet statement from your bookkeeper? 

Ask yourself whether your books are really in order or are you just trying to file your tax return once per year?  If you are a business owner, you should set aside a bit of time every month to review your balance sheet as it’s your scorecard, a cumulation of all of your past business.

By examining your balance sheet and profit and loss statement, you will better understand the relationship between the two reports.  Every time your company records a sale or an expense for bookkeeping purposes, both the balance sheet and the profit and loss statement are affected. If you don’t have time to look at other financial information, these two reports are the basic financial statements that all small business owners should be reviewing.

The balance sheet shows the financial position of your company on a specific date, such as the end of every month or every quarter. It displays what the company owns (assets) and owes (liabilities), as well as your accumulated equity. You should look over the balance sheet for indications of your effectiveness in using debt and assets to generate revenue that gets carried over to the profit and loss statement.

The profit and loss statement, also called an income statement, shows your company’s revenues, costs, and expenses. It tells you whether you’re generating a profit or loss. Also, the profit and loss statement provides valuable information about sales, revenue and expenses. The two statements are useful in knowing the overall performance, profitability, and position of your business, to enable you to make decisions.

Because you can make comparisons

Compare the two statements to previous months, or even last year(s). This way, you can look for trends. What’s working and what isn’t? How much are you investing versus what kind of return are you getting? Compare your assets, liabilities, and equity to the industry standard. We recommend checking out the recently released  2022 North American Industry Classification System (NAICS). It includes notable updates related to the digital economy.

Because it’s a key tool used in financing

Do you need to hire staff? Want to purchase new inventory? Well, since the balance sheet shows your company’s total assets, liabilities, and net worth, it can help inform potential lenders about your business. Lending Loop is Canada’s first fully regulated peer-to-peer lending platform focused on small businesses. Since it can be a struggle for small businesses to afford financing because of all the costs and overhead of banks, Lending Loop developed a platform to connect all types of investors with small businesses in Canada looking for financing to grow more profitable.  Their minimum loan qualification criteria are one year in business, $100k in annual revenue, and a 600+ personal credit score. They will also want to see two to three years of financial statements —including balance sheets and profit and loss statements—as well as a business plan, and personal guarantees.  

Because it can tell you the overall worth of the business

Wondering what you can do now if you plan to sell later? Prepare for the sale as early as possible. No matter why you want to sell your business, it’s important to focus on the long-term objective, otherwise, you could end up making short-term decisions that go against your plans. The improvements you make will ease the transition for the future buyer and keep the business running smoothly.

Because it will tell you exactly how much GST/HST you owe 

Don’t wait in fear until the bookkeeper gives you only a few hours to come up with thousands of dollars. The line that says GST/HST payable under Current Liabilities on your balance sheet? Look at that line at the end of each month to see how much you owe.

Because it will give you the answers to key questions:

  • Do I need to invest in new assets? 
  • Are my current assets performing and getting a good return on my money?
  • Can I take on more debt? 
  • Should I pay myself a dividend?
  • Should I incorporate?
  • Should I create a holding company

You can analyze the balance sheet to figure out how well you’re putting the company’s resources to work.  Remember that your balance sheet shows assets, liabilities, and equity and the total assets should equal the sum of total liabilities and equity. Retained earnings are the money not paid out as dividends, but held back to be reinvested in the business or pay off debt.  

Because the very top of it all has to do with cash flow

A balance sheet shows what a company owns in the form of assets and what it owes in the form of liabilities. At the top are current assets, which is anything a company owns which holds some amount of value and could be liquidated and turned to cash. These current assets include cash and cash equivalents, accounts receivable,  inventory, and short-term investments. You can compare current assets to current liabilities to make sure you’re able to meet upcoming payments. But what if you’re not?

One of the biggest concerns entrepreneurs have is with gaps in cash flow, which makes it difficult to consistently meet payroll, pay suppliers, and cover routine expenses. Financing cash flow is a possibility through a few options, which helps companies meet those operational expenditures and even power growth. 

Invoice financing, also known as receivables financing, is a short-term loan that is borrowed against outstanding invoices. A business receives a next-day cash advance for receivables that clients are due to pay. Many small businesses have a hard time covering expensive materials or unexpected costs that pop up while waiting for the money to come in, and that’s where a working capital solution like Velocity by FundThrough comes in.

Because it will help you plan for good years 

And maybe more importantly, for the bad ones. Forecasting can be done for your business’s income statements and balance sheets. Documents showing your business forecasts are called “pro forma” financial statements. Together, they can provide valuable accounting insights to help you better plan for your business’s future growth. These statements allow you to compare your actual current financial status to your financial plan and make any necessary adjustments throughout the year. 

Because it will help you understand tax deductions

In general, the expenses you’ve incurred to earn business are tax-deductible.  A tax-write-off allows your business to lower its taxable income. Small business deductions are a common way that businesses can account for reductions in their revenue due to expenses. To take full advantage of tax write-offs, it’s important to track and record all business expenses as they happen, to deduct them later.  If you use a vehicle for business purposes, then the expenses associated with that vehicle are tax-deductible. Such expenses include gas, parking fees and toll charges, repairs and maintenance, even lease payments if you lease a car. 

In terms of small business deductions, any expenditures are fully deductible in the year in which they are made. However, fixed assets (may include vehicles, equipment, computers, etc.) are not fully deductible in the year they are purchased.  They’re recorded on your balance sheet as assets.  For accounting and tax purposes, you can write off a portion of their cost each year.  Your accountant calls this depreciation or amortization, and for tax purposes, the Canadian Revenue Agency calls this a capital cost allowance. Many small business owners weigh the pros and cons of buying versus leasing, especially the decision to lease or buy technology and other equipment.

Because it will teach you to know when somethings off

Does it seem right or are there key assets or liabilities missing?  Does your bookkeeper know what they are doing? If you’re looking to work with one, ask how often you’ll get emailed statements. A sign of a good partner is if they provide them via email by a specific date every month, basically shoving them in your face.

Please remember though, that it’s your job to check up on your balance sheet and your profit and loss statement. Put in a recurring calendar appointment to review statements emailed to you. One of the biggest mistakes business owners make is not taking time to understand their company’s financial statements. If you don’t have clear financial data, you may miss out on opportunities to improve your business’s finances. Stay up to date and eventually the results will make you look like a hero either to your kids or whoever you’re building the company.