When it comes to running a business, the difference between success and failure can depend on a multitude of things. However, some key aspects of maintaining a well-run organization are often overlooked by novice business owners, which can lead to failure. One of the most important factors of successful business ownership is taking the time to calculate total current assets and make business decisions based on this vital information.
One-quarter of businesses fail within their first year, while half of businesses fail by their fourth year of operation. Although these statistics may be as staggering as they are intimidating, it’s important to look at the reasons behind these failures. Nearly half of failed businesses go under due to incompetence, meaning they price emotionally, live beyond their means, don’t pay taxes, don’t understand pricing or financing, and aren’t able to correctly keep records.
By failing to calculate total current assets of an organization, managers and business owners are depriving themselves of key information that should drive a multitude of their decisions. If your enterprise is lacking correct financial risk analysis information, completing a balance sheet can be a great idea.
A balance sheet is a statements that calculates financial aspects of an organization, including the assets, liabilities and equity. This document is used to calculate the net worth of an enterprise.
When attempting to create or understand a balance sheet, it’s imperative that you understand the “equation” that is used. Essentially, the owner’s equity added to the liabilities of the business equals the total assets. If you’re looking to calculate the owner’s equity, you subtract liabilities from total assets of the company.
Start by calculating assets, money, investments and products that can be converted into cash. These things are what make up a company’s finances and a successful company should have assets that override the sum of liabilities.
Liabilities are made up of things that take away from your equity. This includes operational costs, debt, and material expenses. With lower liabilities, a business has a better shot at staying in the positive as far as assets are concerned.
After you’ve determined your assets and liabilities, you can determine the owner’s equity. These three calculations can provide valuable information when put into an equation. Calculating your equity and identifying liabilities can make room for ideas for improvement that you may not have otherwise been able to acknowledge.