SMALL BUSINESS FINANCE 2: BALANCE SHEET 2
In the previous post, we started constructing a Small Business Balance Sheet. We discussed the ASSETS of a small business. We now go to LIABILITIES & EQUITY.
1 ACCOUNTS PAYABLE. One way of conserving your business’ Cash is to obtain credit from your suppliers. The best is when you can get raw materials on credit, produce, sell and collect before your suppliers’ credit becomes due.
2 NOTES PAYABLE & LOANS PAYABLE. If you don’t have enough personal cash, you can generate capital for your business by borrowing (i.e., promissory note due to a bank or a sympathetic rich relative or friend). Negotiate for the longest term possible. If you are able to wangle a term of more than a year, record the amount due within the year in LOANS PAYABLE and the outstanding balance in NOTES PAYABLE. By distributing your promissory in this manner, it will be easier to see from you Balance Sheet how much Cash you have to generate in the short term (i.e., within the year).
3 INTEREST PAYABLE. You incur interest costs as time passes (usually computed on a monthly basis but payable with the payment of principal). If you expect to make a loan payment at the end of the quarter, within the quarter you should be recording INTEREST PAYABLE for the interest you expect to pay when you make the payment of principal. In this way, you are constantly made aware that some of the revenues you are generating have to go to pay interest.
4 DUE TO GOVERNMENT. Taxes are inevitable, so you have to keep reminding yourself by entering into the list of your Liabilities.
You arrive at your business’ Equity by deducting the total of your Liabilities from the total of your Assets. This is if you were not too meticulous in recording all your transactions.
If you are careful in recording all your transactions, you can record your Equity as the amount you started out with and the sum of Liabilities and your Equity should equal the total of your Assets.
DRAWINGS. Whenever you take out cash from your business’ Cash for personal needs, you have to record it under Drawings (and correspondingly reduce the Cash account under Assets). This will show you how much you have taken out of your business. You will also note that you will have reduced the size of your business by the amount of your Drawings.
