During a meeting last week, I made the comment, “The Balance Sheet is more important than the Profit & Loss statement.” A stunned look of surprise appeared on the other person’s face, and I felt that reaction was because of his thinking, “How can it be more important than what tells you a company’s income?”
This ties in with my being a guest on Jon Stoddard’s podcast (https://bit.ly/3svEZVk) and Jon being on ours (gddpodcast.buzzsprout.com). We discussed the balance sheet and here are some reasons why it’s important:
- It provides a picture of a company’s short-term obligations. Example, net income of $1 million, only $33,000 in the bank, AR and AP about equal leads one to believe the owner is bleeding the company.
- It shows how the company manages debt.
- Asset replacement is visible. Example, a high asset business (say 10 trucks, which wear out), no change in the asset base over the last five years, meaning a lot of cap ex on the way.
- Is the company properly recording work in process, customer deposits, gift cards (if retail)?
- How is cash flow managed and when looking year-over-year, what is the working capital need.?
Jon and I both laughed discussing how we both look at the net income line on both the P&L and the balance sheet to see if they match. You’d be surprised how often in-house statements don’t match.
Know the balance sheet and you’ll know the company’s financial standing and overall performance.
“There are no happy endings. Endings are the saddest part. So just give me a happy middle, and a very happy start.” Shel Silverstein
“It is not the answer that enlightens, but the question.” Eugene Ionesco