The balance sheet tells you what you own, how much you are owed, and how much you owe to other people. Broadly speaking, assets are those things you own, or are owed, and liabilities are those things that you owe to others.

Liabilities include things like overdrafts, loans, and debts to other people (creditors). But are all liabilities bad?

Borrowing money means you have cash to do something with. If it costs you 5% to borrow £10k, and you are able to generate a profit of 7.5% through the activities you can make happen, then you are making a profit of 2.5%. Without borrowing the money you would have made no profit at all. So a loan can be a good thing, as long as you are making good use of the opportunity.

Investments in your business are liabilities. They represent the amount you have been loaned and, as above, you need to be sure you are making the most of the cash. Even “non-profit” organisations need to demonstrate that they are fulfilling their “non-profit” objectives. Is the cash sitting in the bank, or being used properly?

Liabilities also include Trade Creditors – money owed to your suppliers. It is important that you pay them within agreed terms, but don’t pay early if you don’t need to. This enables you to do something with the money.

All business owners and managers should know how much they owe to other people. Not just so they know how much they owe, but so they know how much cash they are sitting on that belongs to others and to be thinking about what they are doing with it.

• Your value is equal to the amount of cash you can raise based on your assets.
• Your wealth is what you have left when you have lost your value.

Wise words from a speaker last night – and two thoughts occurred to me simultaneously.

Firstly, I thought it was a great way to reflect on my personal worth. Secondly, it made me think about how businesses consider their “worth”.

I often talk to business owners about the Balance Sheet, and how important it is to understand what they are owed by others, what they owe to others, and what they own. I will start to add a fourth measurement, what is their worth, over and above their value.

Some businesses do already do this (for example Goodwill). The problem is that “worth” is intangible. You can’t touch it, weigh it, or count it. It exists, but only as a concept. This makes it very hard to quantify.

I believe that “worth” is quantified by others, not by ourselves. It is a measurement of what others think of us, not what we think of ourselves.

As a way of determining how successful we are, I think wealth is more valuable than value.

So what is the Balance Sheet? In a nutshell it tells you three things:

1. How much you owe to others
2. How much other owe you
3. How much cash you have

Now I may be simplistic, but I would say these three facts are the three most important things every business owner needs to know – all the time.

There is a lot of jargon in finance and accounts. I make it my business to explain everything in plain English.

The Balance Sheet is getting a lot of air time because it’s important. If you still don’t know what it’s about. Call me!