There’s an old accounting joke:
Q: What do you call a balance sheet that doesn’t balance?
A: An expensive sheet of paper! 😛
I don’t know if that really is an old joke because I think that I just made it up (actually, I just modified a really old joke about boomerangs) … but, the point is that balance sheets always DO balance; they have to, so once your accountant fiddles the numbers to produce the desired result what do you do with it?
If you’re anything like me, you file it under “who cares?” …
When I ran my businesses, I really struggled with understanding the numbers – as represented by the Profit and Loss (or Income) Statement and the Balance Sheet. My accountant didn’t even bother to run cashflow statements or forecasts for me, and I would have had no idea what to do with them if he did!
Yet, that opened me up to ‘success [or failure] by luck’ rather than by design …
My friend, Andee over at onesherpa.com, being a former Big Business bean-counter-type, understands the problem all too well and has developed a much better way of looking at the numbers in your business – or your life – called The Financial Fence.
Here’s what Andee has to say about the dreaded balance sheet:
You may have seen a balance sheet that shows; Assets minus liabilities equals Equity … [but] here’s how we do balance sheets in the 21st Century.
Working Capital Plus Fixed Capital equals Debt plus Equity.
Think about buying your first home. Probably looked like this:
Home (which equals Capital).
Paid for by:
Debt (borrowed from the banks),
Equity (contributed by you).
That’s how we do balance sheets because they make sense to the average person who has bought a home. It’s very easy for them to understand.
Think about your business for a minute:
You will have working capital (Inventory, accounts receivable, accounts payable, employee provisions etc.
You will have fixed capital (plant & equipment, motor vehicles etc).
And these will be paid for by:
Debt (borrowed from a bank) and
Equity (which is your wealth tied up in the business).
When you do balance sheets like this it becomes easier to understand what you’re accumulating and how you can use this to help you run your business.
This is a surprisingly simple yet powerful way to rethink your business/personal finances and I suggest that you learn everything that you can about it … to get you started, Andee has a great game, which I feel is a worthy rival to Robert Kiyosaki’s CashFlow series of games and which will really help you in your personal financial life.