The Language of Numbers Series, Part 2

Part 2: The Language of Numbers Series

by Christine Weisgarber

Picking up where we left off last month, we are translating what the financial information from your business is telling you. Last month we covered how to use information on a profit and loss report to improve your operation, increase profit, and track expenses. There is information from the profit and loss report that gets applied to the balance sheet, like many things, they are connected. A balance sheet is a snapshot of the health of your business. It is called a balance sheet because the assets are equal to liabilities, and equity.

What is an Asset?

The cash you have in the bank is an asset to your business. Many say, ‘Cash is King’, and in most cases it is. Cash has value, not just to you but to others therefore it is an asset. Another asset is the cash others owe you. We call these accounts receivable for a business. Someone has promised to give you their cash in exchange for caring for their horse, therefore you have value in what they owe you, or what you are expected to receive from someone. Now let’s apply that idea of value to other assets. For example, horses in a lesson program are a great asset. They generate money for your business and have value. The same could be said about hay equipment; it generates money in the form of hay and has value. Property, whether it is in the form of land, livestock, or your facilities are assets. A tack shop’s inventory is also an asset. Here’s the next thought I want you to have, “what if I have loans associated with my property or equipment, etc., are they still assets?” The short answer is yes but read on to learn how that plays into the equation of the balance sheet.

What are Liabilities?

If you have assets, you most likely have liabilities (if not, kudos, you have equity… more on that later). A liability is what you owe to others, such as the bank. It can also be what you owe employees, a trainer for their services, a veterinarian for emergency care, or many other ‘accounts payable’. Take note, the difference in vocabulary. Accounts receivable is what someone has agreed to pay you, as mentioned above. In comparison, accounts payable is what you have agreed to pay someone else.

So, what if you have liabilities associated with the assets of the business? The assets still have value even if you owe someone (like the bank) to have them. The ‘equation’ associated with a balance sheet is important and here’s why, assets will equal the liabilities and equity of a business.

What is Equity?

When you own something that has been purchased by the business with its’ earnings it provides equity to the business. Those earnings are called retained earnings and the number actually comes from the profit and loss report we discussed last month in the form of cash. (I am now laughing at myself because I just think it is so cool how all this works together. Maybe you do too if you are still reading.) Retained earnings are what you have ‘retained’ after the costs of doing business have been subtracted from your income.

Equity and assets equal after you have subtracted what you owe to others. As you operate your business, and you pay on loans you are decreasing your liability and increasing your equity. Let’s put it in an example.

You have purchased a new tractor to use on the farm. To do so, you took out a loan from the bank. The tractor is an asset because it has value to you (and others if sold) and the loan is a liability. At this point, the two amounts are equal.

You are going to pay the loan (liability) off with the earnings from using the tractor (equity) until the loan no longer exist. By doing this you exchange money made from doing business (retained earnings) into equity by owning the asset, in this case, the tractor, outright.

The beauty of what we have just discussed is part of building a healthy business. Keeping an eye on the parts of a balance sheet keeps your business balanced, pun intended. Banks and lenders will do the same thing to determine metrics like debt to asset ratio and the liquidity of your business. At this point it can get complicated because interest and depreciation play a part as well as how the cash from doing business flows to each account. That is something for next month but in the meantime, if you want to have a more in-depth conversation about this, please give me a call or send me an email. 330-474-9984/Christine@brazenbusinessservices.com

Christine Weisgarber has been around horses for more than half her life having experience with equine businesses and showing. She is a Certified QuickBooks Online ProAdvisor, member and supporter of the Massillon Saddle Club, and a proud mom of three young children. Her children were the deciding factor in opening her home-based business, Brazen Business Services LLC. Brazen, or brave, is exactly what it takes to start and run a business. She helps business owners navigate business decisions by providing accurate, up to date financial information for a more profitable business without wasted time and stress. Her services are online based with great customer service for bookkeeping and income tax services. For more information visit www.brazenbusinessservices.com