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Why Small Businesses Are Different If you are a small business owner or entrepreneur then you need to be able to read and understand your balance sheet because first it is through your financial statements and other numerical data that you collect that you really get to know your business. Michael Gerber the best selling author of the E-Myth Revisited says it much better than I ever could as "because without the numbers you can t possibly know where you are let alone where you re going. With the numbers your business will take on a totally new meaning. It will come alive with possibility." The very first step you will ever take down that road to really knowing your business is through examining and understanding your own balance sheet.
To many non-financial people the balance sheet does not make sense in any case so they gravitate to the only report that is an easy read namely the income statement. Assets and liabilities are just too complex to grasp. In the last ten years or so this has changed so much so that readers and users are advised to lend substantially more credence to the balance sheet than the income statement. This "discrimination" exacted on the income statement is so severe that some investors are encouraged to even ignore the income statement as a whole. Why is this so? It could be the fiddling with revenue figures by many now defunct corrupt corporations which reported highly profitable figures whilst these businesses were heavily indebted (liabilities) or technically insolvent. Moreover high revenues are no guarantee against bankruptcy. Historically an income statement was drawn up first and the balance sheet second. The balance sheet became the "rubbish bin" for all items that could not balance the books.
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There are many forms of debt. There is secured debt. That means that the debt is secured by a lien against an asset that you own. The lien and the debt should be for less than the resale value of the asset. Unsecured debt does not have any such lien and is hopefully based on your capacity to service the debt. The problem with unsecured debt like credit cards is that it is not offset by some asset that you own and acts only to reduce the net worth on your balance sheet. Credit card debt would thus be categorized as bad debt as it only acts as a drag on building positive net worth.