One of three key financial statements that any business absolutely must consider (along with their income/expense and cash flow statements), a balance sheet is a hugely significant document which measures your company’s net worth based upon a comparison of your liabilities and equity. This will provide you with a telling picture of the financial standing of your company. If your liabilities are too high, a change in strategy may be required. If, on the other hand your equity is higher than your liabilities you’ll know your future is at least temporarily secure. Basically, this document measures how much you’ll be able to keep of the equity you’ve earned and whether or not the assets you invested in are paying off. In other words: how much money are you taking in and how much are you giving away?
HOW DO YOU CALCULATE NET WORTH?
The formula is rather simple, but it requires a great deal of work to carry it out. Essentially, here’s how it works:
You borrow or promise money to various people. You guarantee your employees a certain salary. You rent space for your business. You perhaps take out a bank loan. Maybe you’ve chosen a business, a restaurant for example, where new items have to be purchased weekly or even daily to allow your work to function. These are liabilities, money which has to be paid out regularly. You have to bring in enough capital to meet your level of financial liability every period to simply break even.
You purchase some assets, tools which you will need to carry out your plan. If, for example, you’re a web development company then the computers you purchase for your employees to use would be examples of assets. This also includes any real estate you flat out purchase (not rent) to house your business. You hope that these assets will translate into increased revenue.
Any money you make from customers through the utilization of your assets is recorded as equity. You use this money to pay off your liabilities. Whatever money is left over is profit. This profit becomes one of your primary assets.
The more excess capital you are able to generate the more profitable your business is. Basically, your net worth is your equity, the money you’ve earned through your interactions with clients, minus your liabilities.
WHY IS THIS IMPORTANT?
If your level of equity does not exceed your level of liability then your company is not profitable. If this is the case then a serious change is an absolutely necessary next step. You deserve to know the true status of your business. Call AFS Taxsavers today and learn the truth.