Written by: Stephanie Thompson
Business owners know financial statements are an important part of every business, but why? A company’s financials tell a story. From an overview, they show whether you are profitable or not, they can tell how much debt you have and how much cash you have in the bank. From a detailed perspective, financial statements tell the story of the company’s spending habits. It shows how much money has been spent on certain categories and those spending trends can give insight into areas that can be improved to help your bottom line, and therefore improve cash flow.
Understanding your company’s financial statements will open up a world of understanding. It is important to have this understanding, after all, this is how informed business decisions can be made! For example, do you have extra cash that you could be investing (money market or other safe place), do you expand your business, do you improve upon your current business, do you spend money on improving your internal practices and policies (perhaps become more automated, which might free up time to focus your time on other areas of the business)?
If you are reading this and want to have a better understanding of the financials in front of you, you’re in the right place. My goal is to strengthen each Business Owner and Director’s understanding of their financial statements. There are simple ways to look at your financial statements and gain an understanding about what they are telling you.
Your Balance Sheet breakdown
Let’s start with your balance sheet. The balance sheet is an important part of the financial statement package. Not only is an accurate balance sheet important to current/potential investors or your bank, but it also tells a lot about your business and how it’s run.
Assets
The balance sheet starts with your assets. At the top are your bank account balances as of the ending date you choose to look at. Then there are your receivables (who owes you money), security deposits you paid for rent, and fixed assets you own (buildings, land, vehicles, furniture and equipment, etc.). The amounts recorded for your assets are the purchase values and over time, these assets will be depreciated or amortized over certain period of time. If you or your accountant are not accounting for depreciation and/or amortization each month, your tax or accounting professional SHOULD be giving you these amounts).
Liabilities
Your liabilities are monies owed to others. Examples are payroll tax taxes (you withhold money from employees’ paychecks, which you then pay to the state or federal government). That money is considered a liability until you pay those taxes. Another example is short and long-term debts, which could be could be credit cards, bank loans, mortgages, etc. As you make principal payments for loans, the amount on the balance sheet will be reduced, therefore showing your current amount owed.
Equity
The Equity section is the last section of the balance sheet. This is where you’ll find the total profit of your business that has accumulated over the years, as well as what funds you have put into the business (called Owner Contributions) and money taken out of the business (called Owner Distributions).
What story is YOUR balance sheet telling you?
At any point in time, you should be able to run your balance sheet report to a see if you have enough cash in the bank to pay off your debts. Even if you did have that much cash in the bank, the suggestion isn’t to necessarily pay the debts off all at once. There are strategies for paying off debt early and still retaining a healthy cash balance.
The goal is to make sure you have a cash reserve. The recommended cushion of cash to have is at least 3-6 months of operational expenses and the cost of at least 3-6 payroll runs (include payroll taxes, employer sponsored health plans, and retirement matches in this amount). Utilizing a bank account for each center’s operational expenses and a separate payroll account for payroll costs (all centers can use one payroll account), will make it easy to see, at a glance, where you are at with your cash cushion. Of course, if you don’t quite have the recommended savings, that should be your goal to work towards. The more savings you have, the less stressful the day-to-day operations become and certainly helps in a scary scenario of another pandemic or recession. If there’s one lesson COVID-19 taught us, it’s the importance of a maintaining a cash reserve!
Thanks for reading! Be sure to look out for Part 2 of this blog!
Be sure to check out our other posts!
- Are you prepared for the new minimum salary rule?
- How to Handle Difficult Parents
- The Importance of Strong Financials – Part 2
- Keep Calm and Comply On… Licensing Is Here!
- The Importance of Strong Financials – Part 1
- Welcome!
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One response to “The Importance of Strong Financials – Part 1”
[…] is Part 2 of a 3 part blog. If you haven’t read Part 1, you can find it here. This blog is recommended to childcare business owners who want to learn more about accounting for […]
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