It’s year end and time to make the final tally of income and expenses for the year. Whether you keep your books with a pencil based system, electronic spreadsheets or accounting software, the sooner you get the year closed out, the happier you’ll be.
Your net income for the year is just one part of your financial progress report for 2009.
A Balance Sheet or Statement of Financial Condition is the other.
A balance sheet, in simplistic terms, is a piece of paper that has three sections:
- Assets A list of items you own and their values
- Liabilities A list of whom you owe and how much
- Net Worth A number that reflects the difference between Assets and Liabilities and represents your ownership in dollars
All of the numbers on a balance sheet reflect figures as of the specific date of the balance sheet. As a result, the balance sheet is often referred to as a financial snapshot in time.
For bookkeepers and accountants, the balance sheet serves a purpose of reflecting the changes in a business’s assets including depreciable assets at book values, (cost less depreciation) and liabilities on the same day and month (usually December 31) from year to year.
Granted, the accountant’s balance sheet is good stuff, but as a business owner you want to know what you and your business are really worth at fair market value (FMV) not book value.
A way to do that is to create a hybrid balance sheet, A Statement of Financial Condition.
It lists assets at FMV and all your debts. The result at the bottom is your Net Worth. It looks like this:
stmt of financial cond
If you’d like your own blank copy of this Statement of Financial Condition, e-mail me by clicking here. Put “Net Worth” in the subject line and I’ll e-mail a blank form back to you. You can fill in the blanks with a pencil.
I recently spoke with a long time lender in the agricultural credit world. He prefers this hybrid type of statement with all loan applications over the statements with book values. Fair Market Values make his job easier with credit decisions and the borrower benefits because it usually shows a stronger net worth.
Remember, your business is either growing in value or shrinking in value; it never stands still.
The annual statement of financial condition is an excellent way to monitor your progress.