For years I have been telling readers to write down the three most important information points for their finances. The key to keeping a clear, cohesive, and accurate financial roadmap is to know the right questions to ask.
A good number of people think that if they just write down their “balance sheet” and keep it on file, that will be enough in the long run. (And if we’re being honest, most of us don’t actually care how much we spend, only that we have it.) I’ve come up against this in the past when trying to teach people how to do this on a personal level.
I would argue that it is not enough to just keep track of how much money you make or spend. It is important to keep track of how much money you have, how much you are comfortable with, and how much you are willing to pay for that amount. The reason more than 95% of people dont keep a detailed balance sheet is that they are either afraid to open their eyes to what the balance sheet is or don’t want to deal with the pain of keeping track.
Balance sheets are a great place to start. I’m not sure if you have one, but I can tell you that not keeping a detailed one is one of the most painful things about it. Most people end up adding up all sorts of things that they don’t know about, like their credit card debt or mortgage balance.
The reason to add a couple of things up is that balance sheets are so important to people (i.e. the ones who spend more time doing everything and making decisions) that if they add more than a couple of small things up, then you are in danger to make an accurate estimate of your money flow.
This is an important metric that you as a business owner need to be aware of, and more so if you are trying to be profitable. More specifically, you need to keep track of what you spend your money on, and where it’s going. The more you know, the better chance you have to make your business profitable.
The most important factor in this is the time in the market. When you’re in the market for something, you are constantly looking for a place to go and do it. If you spend $50,000 in the market for an item, then you will spend about $50,000 on that item. You can’t predict how people’s business will go in the next 12 months. But you can measure the value of the items and the time spent on them.
This is the main thing you need to know about balance sheet, or any financial statement. If youre expecting your business to be worth $100,000 in 12 months, then you need to know that your balance sheet has $100,000 in assets, $100,000 in liabilities, and $0 in equity.
Balance sheets are the financial statements that you need to prepare for the tax authorities. They are the list of all the assets and all the liabilities of the business. For instance, if you own a business that sells cars, then you need to disclose the balance sheet of the business in order to prepare the tax returns.
The problem is that balance sheets are often too complex and contain too many numbers to be useful. That’s why accounting professionals advise you to use the net present value method, which estimates the value of a future cash flow by using the present value of the cash flows already in the business.