The “That” in question here as you guessed, was their Balance Sheet. And it wasn’t the first time I’d heard that. Pretty common in fact. Goes something like…

That’s important for accountants to look at. Not me. Not the operator. My life is in the trenches. It’s in the streets. I’m battling it out in hand to hand combat, closing deals, shipping product, swiping cards, and leading my team to sweet sweet profitability.

The P&L is where it’s at.

The rest is academic or for the accountants. Probably has something to do with taxes.

So do you need to know about the Balance Sheet?

I mean, you made it this far without even looking at it. How critical can it be?

And to an extent… you are not wrong, dear hypothetical voice of the reader. You’re probably getting along just fine.

But.

Is fine good enough? Or are you ready to go pro.

Because you know who does know their balance sheets? Owners who have sold businesses. Who take home big, huge distribution checks.

So let’s level you up here. We’re not sitting for the CPA exam, so no need to go too deep. But let’s understand what an operator needs to know about that “other” financial statement.

First of all, some broad orientation.

One of the best things about accounting is that it all adds up and matches (or should). To what you ask? Itself. It needs to all come full circle and balance against itself. Without giving a whole course in accounting, we’ll just say that every transaction needs to have two entries that balance each other so that we know everything adds up and is correct.

You can’t just say revenue went up. You have to match it to something else going up - cash, or an IOU receivable, something like that.

The Balance Sheet accounts for things that don’t hit the P&L statement which is just revenue and expenses. They also work together in that profits from the P&L end up on the balance sheet - but we’re going to leave that part alone and to the accountants.

What’s important to know is that 1) it is where we account for non-P&L things across 3 categories and 2) it needs to balance itself.

Assets = Liabilities + Owners Equity

YOU don’t need to understand how it balances or necessarily be able to balance it. But it helps to understand how the P&L and Balance Sheet interact and what ends up there.

For example, if someone loans you money and $100,000 comes into your business, that’s not revenue. You don’t want it to be revenue, because you would then have to pay taxes on it. And you’re going to have to give it back so you shouldn’t pay taxes on it. So what do you do with it? Cash came in… I need a balancing entry to explain what that money is - so you book a loan to the balance sheet. You now have cash (an asset went up) AND you have debt (a liability ALSO went up by the same amount.

Balance. Harmony. Ying and yang. Order inside of chaos. Black and white in a world ombre grey world. Warm fuzzy feelings. It’s borderline religious…

Sorry, I transcended there for a moment into the singularity… where was I?

Ah yes. Matching entries.

I think you got as much as we need for the next part. If something happens not captured on the P&L - it wasn’t revenue or an expense but money moved around - we capture it on the Balance Sheet. And it’s really really important to know what’s living beyond the metaphorical tree line of the P&L.

If you know any part of your balance sheet, it’s probably your Assets. Cash specifically. Or at least I hope you do. In any case, you know what Assets are. Cash, receivables, inventory, loans you made to others, equipment, cars, furniture, IOU notes on post its - all assets.

Here are the parts you should pay most attention to (spoiler: it’s all about cash):

How do I use this?

Cash is the whole goal. Are you getting that yet? IT’S LITERALLY IN THE NAME OF THIS NEWSLETTER. Cash is King, it’s Queen, it’s Prince, Bowie, and Jagger.

We want to put more of it in our metaphorical and quite literal pockets.

We reinvest it to grow, thus bringing us more cash. And eventually we take it home where we live off it, invest it, and trading it for things we enjoy.

We watch cash and AR to know what we have for rainy day reserves - I wrote a whole article on this - as well as for reinvesting into strategic initiatives, and then of course for distributions to those previously mentioned pockets.

I like to look at cash + AR regularly to know how much money I have to work with. I look at the totals for both and the % split. I want SOME split because if I’m growing and invoicing regularly there should be a healthy amount that is current to be paid. It’s a sign of growth for a service business. But I don’t want too much because that means I’m not converting it to cash fast enough.

If AR gets too high, I need to go out and push collections. If AR is low, I probably need to go out and push sales.

My cash and AR are the fuel for my business so you bet I’m keeping a close eye on the gauge.

While I love watching that cash number go up. I need to make sure it’s not because I’m not paying things that need to be paid. Looking at liabilities is how we know how much of that cash isn’t really ours.

I like using credit cards, it gives a business 30 days of float essentially at no cost (pay that off each month though - it is not a good source of DEBT). I need to know how much is going to be coming out at the end of the month from my cash stack.

Same for payables. This helps us keep track of payments and not lose sight of them in our inbox. Make sure you’re keeping bills entered regularly so you know what’s outstanding.

We can’t make distributions or reinvest money that needs to be somewhere else soon. But. If we have good line of sight on our cash, and our receivables (future cash), then we can use funds in our account even with liabilities because we know we have it and/or more is coming. This is a big part of making better decisions through good books and financials: knowing what we have and what’s available to use.

We also need to track long term debt. Stuff we’ll have to pay back at some point. This is funding the business so it’s not viewed the same as credit card balances or bills payable. It shouldn’t change much so this isn’t a number you need to check and act on ever month. But when looking at the big picture, it’s an important part.

This is usually the trickiest for people to wrap their head around and so they just ignore it. But this is good stuff here. This is your ownership. It’s all about cash, yes. But this is how much is actually yours.

Of course there is a lot of accounting-ey stuff in here and we’re not going into that.

So think of the Equity portion like this.

If you sold the business, you turned every asset into cash. AR got collected, inventory sold, furniture liquidated. Your balance sheet is one big Cash = ____ number.

Cool.

Then you pay your debts all off.

The rest is yours.

Assets = Liabilities + Equity

A simple breakdown of Equity is usually something like:

So that comes to $200,000 in Equity in the business.

How do we use it?

Because your business isn’t entirely liquidated into cash, it’s hard to tell how much you actually have in it that is yours. This is that calculation. This is what is left over for you if you did turn it all into dollars.

That is equity.

Ok, to summarize, this isn’t quite as day to day operational as your P&L. It’s more about the general health of your business and it shouldn’t be swinging wildly month to month. So you can get by without it being top of mind (EXCEPT FOR CASH). But long term, when you start making plans to reinvest profits, allocate capital, take big distributions, or even sell… this will become more and more important to you.

The actions found here are more quarterly and annual actions. But they’re big, important ones.

Track your receivables closely, stay on top of your payables. Know how much cash you have, how much is available for use, and how much you can reasonably take home.

That’s what it’s all about and that’s what we learn from the Balance Sheet.

Hope that was helpful.

We’re under 70 days until year end, which means 1099’s, W2’s, year end books, and yep- TAXES.

If you don’t have your books in order and you don’t have a person handling your taxes, get that sorted out NOW. It’s really stressful to have to tackle that all in the middle of the busy season with a looming deadline.

You’re getting a heads up now so let’s do something about it. No excuses.

If you need someone, reach out to us and we’ll send you info on our tax planning and filing services as well as talk about cleaning up books if you need that.

AND if you want to know more about how Good Operator can help you build a CASHFLOW MACHINE with proper bookkeeping and accounting, check us out.

As always, thanks for reading.

Chase “finance puns are my love language” Spenst