The following excerpt is from franchise expert Mark Siebert’s book The Multiplier Model. Buy it now.
Income statements can help determine your bottom line — but how can you measure the success of your business beyond your expenses? This is where the balance sheet becomes a good scorecard for your business’ health.
The balance sheet
Your balance sheet is essentially a rundown of what you own (assets), what you owe (liabilities) and the accumulated equity you have invested or built in the business over the years.
Opposed to your income statement (which shows your profits and losses), your balance sheet lets you know how much ,omey you have to work with. It can tell you how much you have in the bank, how much you can expect to come in and how much you have in hard assets that represent your company’s value (all of which might help you get financing from a lender).
The balance sheet equation is your total assets should be equal to the sum of your liabilities and equity. This equation should always remain in “balance.”
Related: What Is Franchisor Financing? Here’s Everything You Need to Know.
Understanding assets
Your assets are your company’s resources that have an economic value. These can be broken down into current assets and non-current assets.
- Current assets are your company’s line items that can be easily converted into cash. Current assets can include the money in your checking and savings accounts, inventory and accounts receivable (money owed to your company from other sources, like your clients).
- Non-current assets are your company’s resources that are not so readily cash-available. These can include the building, land, office equipment, furniture and your accumulated depreciation.
Add up your current and non-current assets to determine your total assets.
Understanding liabilities and equity
Your company’s liabilities are what your company owes (what it’s “liable” for). Like assets, liabilities are broken into current and non-current line items.
- Current liabilities are obligations that are due in under 12 months (in the short term), such as payroll or short-term loan payments.
- Non-current liabilities are longer-term. Long-term portions of a loan would be considered a non-current liability.
Add up your current and non-current liabilities and you get your total liabilities.
Equity on a balance sheet is the ownership claim to your company. This includes money that an owner has put into the business and the shareholders’ stake.
When you add total liabilities and total equity, you should find that it is equal to (in balance with) total assets.
Don’t be scared but be further prepared
The purpose of providing this brief overview is not to give you enough financial education to be able to run a business. It’s instead to warn you that if you don’t know at least this much about finance, you’re jumping in with a significant obstacle.
It’s as if you’re going to a foreign country where you cannot read the street signs and trying to find your way to your destination. You can do it, but if you don’t understand the language, it’s going to be a lot harder.
The street signs you will use to get to your profitable destination are all found in your financial statements. If you can’t read them, it will be impossible for you to know whether you are making progress toward that goal.
So if you don’t understand finance, one of your first tasks must be to recruit someone who does.
Related: The 9 Provisions Every Franchise Agreement Needs to Have — and What They Mean
Get started with The Multiplier Model
Going from small business to successful startup to scalable growth takes more than just good luck. It takes a system. Over the last 34 years, franchising consultant and growth expert Mark Siebert has been sought out by more than 70,000 executives looking to expand their companies. Out of those 70,000, only 5,000 had the right systems in place to go from successful to scalable. In The Multiplier Model, Siebert discusses the factors that determine if an entrepreneur is ready to scale their venture — and the best ways to get started. Read more.
This story originally appeared on Entrepreneur
