You can turn around a bad financial situation if you are willing to apply some ‘bare bones’ business basics. In business, there is ultimately one financial scorecard: The Balance Sheet. Every other financial report is a subset of the balance sheet.
The Balance Sheet equation: Assets = Liabilities + Equity
Assets = Claims on the Assets. This equation is in line with the universal law… what goes around comes around. Or, for every action there is a reaction. It’s how we keep financial score in the game of business.
Warren Buffet’s Rules for Business
I love Warren Buffet. Buffet makes money the bare bones basic way. He builds companies that make profits. Here are his rules for business:
1. Protect the Assets. The assets are your ‘stuff.’ The first financial objective is to protect the wealth you have.
2. Grow the Assets. The second financial objective is to expand the ‘stuff.’ Grow cash and other assets.
That’s the game! Let’s look at the three ways that you can grow assets.
1. Through Liabilities.You can borrow money. When you buy a new truck, and get a loan for that truck, assets go up and the liability (a loan) goes up.
2. Through Owner Investment. You can put your own money into the company. Perhaps when you got started, you wrote a check from your personal checking account and opened up your business checking account. Assets go up and owner’s investment (an equity account) goes up.
3. Through Profits. Sell products and services for more than it cost and create profits. Assets go up and net income goes up. This year’s profits show up in the equity section of your balance sheet. When you lose money by selling products and services for less than it costs you, equity goes down and assets go down. That’s the elegant, beautiful, sometimes horrible truth of the balance sheet.
BONUS! Another benefit of profit… you can use it to pay down your debt! Instead of always trying to get by on less, consider how you can make more.
Are you winning or losing the game?
Make sure the balance sheet is right. Then, take a look at the numbers. If you have more liabilities than assets, you are going backwards. You’ll have a negative equity balance. You may be able to fix it. The long-term fix addresses the reason you got in trouble in the first place. Remember, you have to charge more than the products and services cost and you have to have enough sales at the right price to cover all expenses and make a profit. You might be able to borrow more money and you may be tempted to put more of your own money into the company. You might even entice an investor to infuse some cash. However, the only way to create wealth is to generate profits.
Profits solve lots of problems.
There are worse things than going out of business, like building a mountain of debt or getting into tax or bank fraud trouble. You could go out of business. It may be your best, most liberating option. Or, you may be able to fix the one you’ve got. Profits can fix a lot of financial problems!