Episode 46: What Your Balance Sheet Actually Tells You About Your Business

  📍 Welcome to the Creative Minds Smart Money Podcast, where we turn financial confusion into creative confidence. I’m Samantha Eck, bookkeeper and fractional CFO for creative entrepreneurs. Each week I’m sharing my financial expertise and actionable strategies to help you build a thriving creative business. Plus, you’ll hear from industry experts who bring fresh perspectives on growing your business beyond the numbers. Because building a successful creative business starts with strong financial foundations. Your next chapter starts now.

 You are listening to the Creative Mind Smart Money podcast, and today we’re back into our deep dives of financial statements. The three I always tell you you need to look at. And today we’re gonna talk about the balance sheet. So I’m gonna start off by saying most entrepreneurs will only look at their profit loss.

They never look at anything other than their profit loss. But if there’s three statements that you should be looking at every month, it’s your profit and loss, your balance sheet. Your statement of cash flows, it does feel boring, confusing, or not relevant, especially for service providers, especially for most people, because it’s just like there’s nothing.

There’s nothing to see there. But the truth is that it holds so much insight about the health of your business and like the state that you have in your business. So if you want to understand your business like the owner that I know that you are, you need to know how to read it and how to understand it.

Let’s break down what the balance sheet is and what it isn’t. First of all, the balance sheet is a snapshot of a single point in time. What that means is that if you were to go look at last year versus this year, it’s gonna show you exactly what your business looked like last year versus this year. It’s not going to be the same number as it was now it’s going to be like at that point in time, this is what your business look like. It’s a snapshot of your business’s financial position. The formula that when we’re looking at it is that your assets minus your liabilities, equal your equity or the net worth of your business, which I always tell my clients like, that’s a stake that you have in your business.

Of course, it doesn’t track revenue or expenses because of that’s what the p and l does. We already know that. We’ve talked about that before. It just tells you what you own, what you owe, and then whatever is left over. So it’s like your financial report card. It’s especially helpful for lenders, investors future you.

It’s, it’s helpful for people that wanna have that outside perspective on your business, but it is still helpful for you to look at it every month and analyze it and look at it.

Okay, so let’s talk about each section so that we can really break down and get into it.

Your assets are what your business owns, whether that’s cash in the bank, outstanding invoices, inventory, equipment, buildings, whatever you physically own as a business, that’s what goes on your assets. Then we have your current versus your non-current assets. So your current assets are typically assets that are expected to be converted to cash within one year of the operating cycle or whichever’s longer, and then your non-current assets are expected to be used consumed in longer than a year.

So current assets are things like cash, accounts receivable, inventory, short term investments, and then your non-current assets. Are those longer things like. Property, equipment, buildings, things that are expected to be de depreciated over the course of the life. Now, I wanna mention that a lot of smaller businesses, a lot of like service provider businesses won’t have as many like assets and things like that because we’re not really buying buildings as creative service providers.

We’re buying, other things. So it’s not as. Many assets, but we could still have things like accounts receivable. We can still have investments. Maybe you do buy a building for your business. Who knows?

And then the liabilities is what your business owes. Credit cards, accounts payable loans, things like that. Anything that you owe to someone else that is not yourself, you can, well, you can actually owe to yourself too if you wanted to do like a loan to owner. If you’re putting money into your bank account, that, or your business that you eventually want to pay back.

So liabilities, again, are what your business owes. And then there, of course there’s short term and long term. So short term liability is gonna be like that credit card. ’cause usually you’re gonna pay that off within a year, unless you’re only paying like a minimum balance or something like that. But still, it is considered short term.

And then long-term is something more like a loan. If you’ve got an SBA loan that’s payable over 10 years, that’s something that is there now as service writers, a lot of people do have credit cards, they carry loans, they’ve carried, things like that. So the liability section is something you wanna look at.

And when you don’t have the assets to offset the liabilities. That’s where you have that conversion issue. And we really want to look at that.

And then your equity is what’s left over for you, whether that’s owner’s draws, retained earnings, and how your profit rolls into equity. What this number is really telling you is the health of your business. So things that we wanna look at when we’re looking at the balance sheet is negative cash.

Because if we have negative cash, we need to really run. We need to figure out how we get out of that because negative cash is never a good thing because that’s an asset. If you have negative cash and you have liabilities outstanding, that’s gonna put you in a really tough spot. And then high liabilities compared to assets.

What we’re talking about when we’re talking about high liabilities compared to assets is your current ratio. So the current ratio is a ratio that determines how quickly you can pay off your debt based on your current assets. So if your liabilities are higher, that ratio is gonna be really low because you can’t pay off your current debt that you have. And if you were to go to a bank and maybe apply for a loan, maybe you wanted to buy a building, whatever it was, they’re gonna look at you and say, well, you actually owe more than you own right now. So that’s just not, it’s not a smart move for them.

And then the next one is that your equity isn’t growing over time. This one’s super important because. As your business grows, so should your equity, you should continue to have a bigger stake in your business. You should continue to really see the health of your business increase. If we’re seeing that decrease, that’s something that we really need to analyze and look at.

Things that we know are good is positive working capital because of course you’ve got wiggle room, you’ve got room to play around with your business. Cash reserves with low debt. A lot of my clients, don’t have any debt, but they have a lot of cash reserve, which is such a positive sign. It’s a really good green flight ’cause it really shows how he your business is.

And then of course, that your equity is increasing every year. ’cause you wanna see that stake continuing to go up and up and up.

The truth of the matter is when we look at the balance sheet, we wanna understand why does it matter for day-to-day decisions? ’cause I’m telling you to look at this on a monthly basis, and right now you’re looking like, why the hell do I need to look at my assets or my liabilities, or understand what my equity is?

But it matters a lot for some of these bigger day-to-day decisions. So let’s talk about what. To really look for on your balance sheet that will help you analyze and understand, make more confident decisions in your business.

First of all, the balance sheet, because we see our liquid cash on there, we see what our cash is, it’s gonna help us know we can actually afford a new hire, an investment, or a course. If you went in and you looked at your balance sheet today, it’s gonna show you the snapshot of your business as of today.

It’s not gonna show you the snapshot of your business as of yesterday, you could go back and look at yesterday, but really you wanna look at what your business is at today, especially if your bookkeeping is up to date, everything like that. It’s gonna show you if you can afford a new hire, if you can afford an investment, if you can afford a course, it helps you to prevent cash flow crisises by showing your liquidity.

So it shows you if you have too much debt, it shows you if you have too little assets, it shows you that. And then of course if you’re someone who’s like, Hey, I wanna apply for a loan or a line of credit, it’s really useful for that because it’s gonna allow you to, go in and apply for that. And then of course, it can show where you’re holding too much debt or not reinvesting enough.

So if you have too much debt, it’s gonna show you. When you look at that like bottom line liability number, you’re gonna see how much debt you have as compared to your assets.

And then overall, it’s gonna give you clarity on what’s available to you, not just what you earned.

Your business might be profitable, but still fragile, and the balance sheet is going to help you strengthen it and realize where you need to. Really grow your business in purposeful ways. But now let’s talk about some dos and don’ts with the balance sheet. So first of all, you want to review it monthly.

Similar to the p and l. Like I said, that’s one of three reports you should be looking at monthly. You wanna track it over time and look for trends. Look at how your money is fluctuating. Look at your assets fluctuating. Look at your liability fluctuating. Look at how your equity is growing. We wanna make sure that we’re understanding that our equity is growing.

You have a bookkeeper, ask your bookkeeper questions when things don’t make sense. If something looks off to you, ask them a question and make sure that your loans assets and credit cards are being tracked correctly so that you can see the health of your business overall. Use it to support those major financial decisions, because when you’re feeling doubtful or you don’t know if you should actually do something, it’s.

More than, more often than not super, super helpful for that. Now, we don’t wanna ignore it because it feels too advanced. Like your balance sheet is so important. It’s one of those, like I said, it’s one of those reports you wanna look at on a monthly basis.

You don’t wanna use it in isolation, so don’t use it without also looking at your p and l and also looking at your cashflow report. And then of course, if you don’t have accurate bookkeeping, your balance sheet isn’t gonna be accurate. Don’t look at it. If you have an accurate bookkeeping, you need to have your bookkeeping caught up.

You need to have it up to date, because that’s the only way you’re gonna get that perfect snapshot of where your business is at and where you can go from there.

Treat your equity like a cash balance. It’s not a spending account like equity is not. Spending. It’s how much your business has made. It shows the health of your business. If you were to go and get a loan, they’re gonna look at your equity and say, okay, wow, like last year you made like $150,000. That’s really impressive. So again, it’s a cash balance. It’s not a spending account. It’s not money that you can actually spend. And then. Don’t forget that this report reflects your long-term sustainability, not just your sales. So yes, it does pull in your net income like overall for the entire year, but again, it’s not just for looking at your sales, it’s for understanding the long-term sustainability of your business and to see if your business can turn into something more than just a, it’s gonna last a couple years, it’s gonna last three years.

It’s something that’s really going to transform your business.

📍 If there’s one final thing I can leave you with, it’s that if the p and l is the story of what happened in your business, and look what your net income was, the balance sheet is the truth of where you are now. Don’t skip it. Learn to read it and let it guide your next move. If you’ve found this episode helpful as always, leave a review, leave a comment, share it with a friend, and make sure that this episode gets seen by other creatives like you.

I wish you all the best and we’ll see you next week. Farewell fellow Travelers.