Business success is …. a strong balance sheet.

Posted: April 20, 2013 in Business Financial Statements, Up-and-running Business
Tags: ,

Most business owners spend the vast majority of their time reviewing the income statement and, for good reason. Has revenue changed over the last year? Has the gross profit margin improved or declined? What about the general and administration expenses? All of these are important.

The ultimate goal is to generate a profit. This profit adds retained earnings or proprietors capital to the balance sheet.  Business owners do look at the balance sheet but their focus is on inventory size, aged receivables and trade vendor payables. This further augments my belief that business owner focus is on short term objectives:

  • Make a profit (somehow)
  • Collect trade receivables (to)…
  • Pay vendor payables (so that) ..
  • There is cash in the bank account

This is the revolving carousel that small business owners ride year in and year out. The profit motive is certainly an objective. However if business owners were to focus on building shareholder equity/proprietor capital (a long term objective) this would place the short term obstacles (the above 4 bullets) in perspective.

So, the balance sheet is a better indicator of the health of a small business than the income statement. It’s too bad that this is lost on business owners.

 

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