Part 2 Breaking Down the Balance Sheet
Gaining insight from your Financial Statement
For many business owners growing equity in the business is a big part of their long-term goals. All the hard work you put into your business ultimately has to have a reward, beyond just providing you income – otherwise you’re effectively the same as an employee. Taking a wage from your business fine for the short term, but the additional burden of owning a business deserves a payday – whether your goal is to sell or pass the equity in your company onto your children as an inheritance.
This mini-series looks at the key sections of your financial statements, explains what they’re for and provides some simple methods of analysis to help you understand your actual position and highlight possible growth opportunities.
Your Financial Statement can provide you with a clearer understanding of your current equity and provide metrics on how you’re tracking toward your long term goals. It can go beyond that to provide insight on where to improve your business and indicate how you can grow your equity.
Understanding what your equity is from the information in your Balance Sheet is pretty straight forward: Your equity in your business is simply the sum of your assets minus your liabilities.
Equity = Assets – Liabilities
At a glance, your assets include your Current Assets (Things you keep for less than 12 months such as stock, outstanding accounts receivable, and short term investments) and the Fixed Assets (plant equipment, vehicles, real-estate, etc). Your short term liabilities include accounts owed, overdraft accounts or purchases on credit. Your Short-Term and Long-Term Liabilities will also be listed.
One area that the casual observer may overlook is how your intangible assets contribute to your equity. Your intangible assets include
- intellectual-property — knowledge, information or processes that set your business apart from others
- trademarks and patents — formally registered concepts that bring value to your business
- goodwill — the amount you pay for the reputation and performance of a business if you buy one, sometimes called ‘business value’.
It may surprise you the value of your intellectual property within your business. Taking the time to well document internal processes, systems and knowledge bases not only indicates what sets you apart, it also may cast light on where there are gaps or wastes within your systems. It may also highlight there are outmoded systems that could be improved or even reimagined. Taking an innovative approach to these areas could provide a competitive advantage and increase the performance of your business, which is explored in the case study below.
Identify the systems and processes that bring value to your business and apply them to areas that are struggling. Your business may provide a product-line/service A that is highly profitable because of your geographic location. Your other service offerings may be designed to complement as add-ons. Consider the primary needs of your customers using Product-Line/Service A and see if there is a major need you can provide a solution rather than a complimentary service.
Accurately gauging how much your intangible assets and actual business value is a multifaceted process in which you will benefit from engaging a Valuations specialist. That said, your financial statements are a great starting point of understanding the equity in your SMB and certainly will help you understand the fundamentals.
So the next time it’s reporting time, remember – it’s a golden opportunity for planning and development. Yes – we can help prepare financial statements for you, but we’re also here to help you grow! Our specialists come with a wealth of business advisory knowledge – Dean Vane and Lauren Stienheuer are our business specialist partners, and Bill Charlton is our senior business advisor. Don’t hesitate to get in touch – we’re here to help.
Lauren Steinheueur: L.Steinheuer@uhyhnseq.com.au
Dean Vane: D.Vane@uhyhnseq.com.au
Bill Charlton: B.Charlton@uhyhnseq.com.au