Buffing Balances Brings Benefits
The passage from an old to a new year is the right time to focus on cleaning up your company’s balance sheet. Doing so can yield a broad variety of benefits.
On the asset side of the balance sheet, the number one benefit is eliminating the “dead wood” of non-yielding assets. Any assets that no longer produce income, and may in fact be obsolete, should be removed from your balance sheet at this time.
On the liability side, you want to ensure your liabilities are properly stated on your balance sheet as you enter a new year. You want all accruals for taxes, and all other liabilities in which you owe a third-party payment, stated on the balance sheet. Waiting until next year forces you to go back and correct the prior year.
A clean balance sheet helps your banker and tax preparer
Cleaning up your balance sheet at year’s end should meet with the approval of two figures important to your company: your banker and your tax preparer.
If your lender knows he’s looking at reasonably “clean” numbers on your balance sheet, he won’t have to ask as many questions when you seek a loan. If you have an existing loan, and he has requested to review your most recent financial statements, he will be inclined to ask fewer questions, be more trusting of information you provide, be more likely to extend the loan and, conversely, less likely to call in the loan.
Your tax preparer is likely to report to the IRS the numbers you provide her. So if you fail to clean up your balance sheet, you’re essentially reporting “dirty” numbers to the IRS, which could lead to additional, and unwelcome, scrutiny.
A clean balance sheet helps plan your company’s financial future
Having a clean balance sheet lets you undertake some “on the money” forward financial planning. In other words, that cleaned-up balance sheet makes it easier to facilitate your future-looking financial planning process. It also makes you more inclined and more highly motivated to get into crucial forward planning.
When you analyze each account to see what comprises the balance on that account, you are able to create carry-forward schedules that can answer any and all questions about what’s in that account. That’s a way to document what’s in the balance sheet, and very few companies have that luxury, because they’re just so damn busy. That may, in fact, be you.
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It’s easy to become daunted when faced with the intricacies of financial statements, especially when you’re a new business owner. Fortunately, you don’t have to have an MBA in order to make sense of your financial statements, and you don’t have to fear the challenges presented by this very important part of your business.
Week 2: What is an Income Statement?
An income statement is a financial statement that tracks revenues and expenses — money coming in and going out — so you can watch how your business operates over a set period of time. Its main purpose is to show and track whether your company made or lost money during the reported period. Sounds like worthwhile reading material, right? Read on to find out how to make sense of your own personal best seller.
Income statements should be helpful to small business owners in particular, who can use these statements to “find out what areas of their business are over budget or under budget,” says BusinessTown.com. “Specific items that are causing unexpected expenditures can be pinpointed, such as phone, fax, mail, or supply expenses. Income statements can also track dramatic increases in product returns or cost of goods sold as a percentage of sales. They also can be used to determine income tax liability.”
There are two types of income statement, the basic “single step” method, and the slightly more complicated, yet more revealing, multi-step method. Both have their merits; sometimes all you need is a bottom line, while other situations may call for an in-depth view.
The chart below, courtesy of Investopedia.com, compares the single-step side by side with the multi-step:
|Multi-Step Format||Single Step Format|
|Net Sales||Net Sales|
|Cost of Sales||Material and Production|
|Gross Profit*||Marketing and Administrative|
|Selling, General and Administrative||Research and Development Expenses|
|Operating Profit*||Other Income and Expenses|
|Other Income and Expenses|
|Pretax Profit*||Pretax Profit|
|Net Profit (after taxes)*||Net Profit|
Investopedia then goes on to explain the charts, noting the differences and expounding on their uses: “In the multi-step income statement, four measures of profitability (*) are revealed at four critical junctions in a company’s operations – gross, operating, pretax and after tax. In the single-step presentation, the gross and operating income figures are not stated; nevertheless, they can be calculated from the data provided.”
What challenges have you faced in interpreting your income statement?