It is widespread for compact small business owners to measure their financial health determined by their revenue statement or bank account balance and deem their small business “fit” when the bottom line appears very good. To reveal why this approach might be deceptive, let’s apply a dieting metaphor.
Only looking at the bottom line is the equivalent of “sucking it in” when you appear within the mirror. Confident, it looks like you have lost some weight, but what takes place after you exhale? You might appear skinny for a moment, but that version on the circumstance isn’t precise.
In terms of your business’ overall health, the balance sheet is definitely the “real” you. Believe in the earnings statement (also named the profit and loss statement) as your eating plan log. It tells you how properly you did within a specific time period—last week, last month, or last quarter. We all know that there are excellent weeks and bad weeks on a diet regime. If you only appear at one week or month, are you getting a true picture of your overall health? Of course not.
The balance sheet, on the other hand, is depending on everything you have ever done. In our diet program metaphor, it accounts for how much you’ve exercised and what you have eaten over your entire lifetime. The sum of all that information is what you see when you stop sucking it in.
To understand this metaphor, you need to understand what the balance sheet is and how it relates to the earnings statement. Your revenue statement contains information about what has occurred within the current period. Revenue, cost of goods sold and expenses are some on the account types found on the revenue statement.
To get an correct picture of what’s happening in …