- It's important to realize that a balance sheet is a snapshot in time. It is not a summary. It is the amount of assets and where they came from on the exact date specified.
- We're going to go into the statement of cash flows later, but you need to understand that there is a difference between revenue and cash.
- Revenue is calculated by accountants and it focuses more on economic value. Here's a simple example you're likely to encounter in class.
- I run a consulting business. I just signed up a customer for a 6 month contract for $6,000. My client decides that he wants to pay for the $6,000 up front.
- My cash will spike by $6,000 in that first month, and then it will be zero for the next five months.
- However, my revenue will be recorded as $1,000 per month because I'm going to be performing about $1,000 worth of value over that six month period.
- So the important thing you need to know about cash is that a business will die if it doesn't have cash, regardless of how much revenue they generate. You don't pay rent or salaries in revenue. You use cold hard cash for those things.
- So cash is immensely important.
- How should I think about liabilities?
- A liability is anything that we owe someone else.
- If we borrow money to grow the business, we owe them money
- If we have deferred paying taxes, then we owe the government
- If we have collected cash from our customers but haven't rendered services to them yet (like an airline), then we owe our customers
- Equity is what we have put into the business
Tips and Tricks
Balance Sheet: Other Resources