This is Part Two of my key accounting terms every entrepreneur should know series. If you haven’t listened to last week’s episode, go back and do so to learn about the Profit and Loss (P&L) report and the items that sit on that report.
This episode covers more terms that reside on the P&L report and goes into detail regarding the balance sheet.
A balance sheet shows a business's financial position at a point in time. It’s often overlooked by business owners who prefer to focus on the P&L report, but it can be more important. Often, a business that looks profitable on a P&L report, can look more complex when a balance sheet is considered, so it’s an important one to understand so you can get the full picture of your business.
I run through the formula that sums up how the balance sheet works and explain each of the terms that make up that formula - assets, liabilities and equity.
The next term I run through is depreciation - one of those terms that is often hazy in entrepreneurs' minds, despite it being a simple concept. I explain depreciation, with a practical explanation of how it works in a business.
I finish up by explaining the term EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation.
The EBITDA metric is used to normalise a company’s results so that they can be more easily understood and compared to other businesses on a like-for-like basis. While it’s more common in the corporate world, it has come up recently for a few clients, and I think it’s a good term to have an understanding of.
I hope this episode inspires you to look at these reports in your business and check in with how your business is performing. Your business is only ever going to reach its full potential if you get across your numbers. To get across them you need to not be scared of them, look at them regularly and try to understand the terms.
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