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Jul 31

Understanding how your business functions financially is often one of the most overlooked yet important functions of being in business.  Beyond the necessity of cashflow and understanding where your money is going each month, is the critical matter of being able to adequately represent your business' financial viability for creditors, vendors, bankers and even potential investors.  That's why it’s important that you have an accurate representation of income with proof of that amount.  This doesn’t become obvious to many business owners until the first time they need to purchase a house, buy a vehicle or seek funding to grow the business.  Years often pass where the owner’s personal equity is grossly underreported making securing loans difficult if not impossible especially in today's tighter lending market. 

 

Owner’s Equity

To establish what the business and in many cases, what the business owner(s) are worth there are a few basic steps in making the calculation.  First, gather information on all personal assets including the home, jewelry, cars, vacation property, retirement, savings and any other personal belongings.  Next total all liabilities the individual has including outstanding debts such as a mortgage, credit card debt, student loans, or any other financial obligations.  Now take all assets and deduct liabilities.  This number will be the individual’s total net worth. 

 

The same calculations hold true when looking for a business’ net worth.  Using the balance sheet, liabilities are subtracted from assets resulting in a net worth figure.  For corporations, the calculation will need to include shareholders/stockholders on the equity portion of the balance sheet.  Included in the stockholder section would also be line items for reserves, retained earnings, stockholder equity, and capital.

 

Two other reports which are critical to understanding the business’ financial health include the income statement, which reports the company’s profit and/or loss and the statement of cash flow, which provides a reporting of the business’ ability to generate cash.

 

If managing your small business is becoming overwhelming, there's help available by contacting a trusted PASBA small business professional.  From accounting to bookkeeping, payroll, taxes and business consulting, you'll find a network of resources just a phone call away.

 

 

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants,  Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations. To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

 

Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice.  Any information contained in this article does not fall under the guidelines of IRS Circular 230.

 

Copyright Information 2011 Professional Association of Small Business Accountants

 

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