Your personal balance sheet is important to your business as it gives an accurate picture of your financial situation. If you are self employed, a personal balance sheet is usually prepared by your business for tax purposes. Most businesses use them to provide payroll options to their employees. Because they contain a summary of all income and expenses, they allow you to see your personal situation in a clear format.
A personal balance sheet compares your current assets and liabilities with your net worth. Assets can include cash held by your business, accounts receivable, accounts payable, and inventory. Liabilities include any mortgages, personal loans, vehicle loans, and personal credit balances. Your personal balance sheets will also show your cash flow, which consist mainly of your gross profit plus the cost of good sold, minus your total expenses, less your gross profit.
The majority of your personal balance sheets will show all cash inflows and outflows. Cash inflow represents the gain in your inventory. Outflow represents the loss in your inventory. Most investors focus on the assets on their balance sheets, while many neglect the liabilities incurred. Many small business owners struggle with the need to track their personal credit card debt because the business is so volatile.
One of the most important parts of the personal balance sheet is your net worth as it is commonly referred to. This figure includes the value of your homes, automobiles, business properties, and personal property such as furniture and clothing. Your net worth will fluctuate depending upon the appreciation in the value of your investments, whether your home appreciates or depreciates, and other factors. Net worth is derived from subtracting your liabilities from your assets. In other words, if you owe money to a credit card company, then that money is not included in your net worth statement.
After you have subtracted your liabilities from your assets, the remaining figure is your personal balance sheet. This is the starting point for any analysis of your personal finances. The starting point is your total assets minus your liabilities. You can find your starting point in the current stock market price, bank statements, personal credit history reports, stock market quotes, or any other information that allows you to identify where you are in your financial health.
There are several reasons that your personal balance sheet may be a reflection of your overall financial health. Some of these reasons include but are not limited to, a negative net worth, a low or negative net worth, if you have reached financial goals, and if you are re-evaluating your personal finance needs. Each of these areas requires a unique approach. Once you understand your personal balance sheet, you will know what type of analysis you need to make to meet your financial goals.