What’s a Balance Sheet . . . Not The Answer You Expect! (May 2024)

What’s a balance sheet?  I’m going to put a different spin on it. It’s the culmination of all the business decisions you have made from inception through today.

The balance sheet is the sum of every hiring decision, customer service interaction, product shipment, marketing initiative, capital allocation, profit distribution and on and on and on. Now, that’s not how most people think of a balance sheet but that is what it represents. Sure, it’s expressed in dollars and cents starting with cash in the bank and listing all of your assets, followed by liabilities and then the difference (net worth or equity).  But embedded in the dollars and cents is the math behind each small decision since day 1.

Early start up losses are part of retained earnings. Sure, they may be dwarfed by future profits, but they are part of the math. That home run sale made in your second year is in there, too. So is the bad hiring decision that resulted in poor customer service which cost the business a great customer. Show me a business with a strong balance sheet, and I’ll show you a business that has made a lot of good decisions over the years. A weak balance sheet reflects more poor decisions than good ones.

Thinking more broadly (beyond just the numbers) we could develop a non-financial balance sheet. Let’s call this the “Reputational Balance Sheet”. What would be on it? Assets might be a company’s reputation for on-time performance or its knowledgeable sales team that is solution focused. Liabilities might be a reputation for quality lapses or surly customer service representatives. And brand equity is the net of all those factors. I often reference BMW. On the asset side they are fantastic cars to drive but the liability (in my opinion) is that they are incredibly expensive to maintain once out of warranty.

Individuals have balance sheets as well. Anyone who has ever applied for a business loan or mortgage has likely completed a PFS (Personal Financial Statement). This document lists both everything you own and owe (balance sheet) as well as income and expense levels. Like a business balance sheet it is the culmination of all the decisions you have made over time. Investing $50 per month since you first started working and it shows up as an asset. Spending $50 more than you make every month shows up as credit card debt and upside down car loans.

And just like businesses, individuals have reputational balance sheets. It consists of the positive (assets) and negative (liabilities) way in which others view you.

A good accounting team delivers a financial balance sheet to the business owner every month, but I’d encourage the business owner to think about the reputational balance sheet as well. Time spent developing this with your senior team and asking customers how they think about your company’s strengths (assets) and weaknesses (liabilities) will be time well spent.

On a personal basis, I’d encourage you to calculate your financial balance sheet on at least an annual basis as well as developing your reputational balance sheet with the help of friends and trusted colleagues.

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to [email protected]

The archive of these monthly newsletters is posted at the Resources section of homza.com

your cash is flowing.  know where.®
Ken Homza
Copyright @ 2024 Homza Consulting, Inc.


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