SPOTLIGHT BUSINESS Demystifying Your Balance Sheet Take a deep dive into understanding balance sheet terminology and its application. By Noel Flynn in the April issue of Keynotes), you should read that article first before proceeding with this one. As a business owner or manager, it’s imperative that you have at least a basic understanding of your two primary financial statements. No, you don’t have to have a degree in accounting, but — as I’ve said many times before — if you’re going to play the business game, you should be familiar with how the score is kept. Would you seriously consider playing a card game such as poker if you didn’t know the rules or how the winning hand was determined? I think not! If your business is not incorporated (such as a sole proprietorship), you may not be T 18 familiar with these financial statements. That’s because when filing your annual personal tax return, you simply complete a Schedule ‘C’ form (aka Profit or Loss From Business) that lists your business-related income and expenses. If you don’t have inventory or if you run your business on a cash basis of accounting (rather than accrual basis), finan- cial statements (especially a balance sheet), will likely be perceived as less important. This article is written for those businesses that are incorporated and employing, or required to generate, financial statements. Unfortunately, many small-business owners only see their balance sheets annually, when prepared by their accountant as part of their annual business tax return. These owners are missing out on a great monthly (or at least quarterly) business management tool. Let’s remind ourselves that there are two primary financial statements used to measure the performance of a business: balance sheet and income statement — aka profit and loss statement or P&L. (A third, statement of cash flows, will not be covered in this article). This article will focus upon the balance sheet. As with all things accounting, terminology can confuse us non-accountants. For perspec- tive, first we’ll revisit the income statement very briefly and then move on to the balance sheet. Although the content is similar overall, the financial statement ter- minology used in the not-for-profit world seems clearer in some ways. Instead of KEYNOTES MAY 2021 his is the 21st article in the “Tools for Managing Your Business” series. When it comes to understanding the two primary financial statements, many business owners and managers seem to struggle most with the balance sheet. If you have not yet read the previous article in this series (“Demystifying Your Income Statement” a balance sheet, we have a “statements of financial position,” and instead of an income statement, we have a “statements of activities.” We’ll be referencing the for-profit format in this article. The Income Statement: A One-Season Scorecard Following is a repeat of information from our 20th article. An income statement is a one-year scorecard, sort of like one season for a football team. At the end of each season, we can see the team’s perfor- mance for the 16 regular games. But for the next/new season, we hit the reset but- ton, and the performance scoring begins all over again. Your business generates an income statement for each month of the year, plus a cumulative set of numbers for any past monthly numbers of that same year, which is commonly referred to as “year-to-date” (YTD). Thus, we say that an income statement (or P&L) tells us what happened for a period of time, which could be one month (each game), several months (several games) or one year (the full season). Figure 1 provides an abbreviated for- mat for a simple, typical small corpo- ration’s income statement, without the YTD columns. WWW.ALOA.ORG
