Your P&L tells you how the month went. Your Balance Sheet tells you where the practice stands on one day: what it has, what it owes, and what's left over for you. A few minutes with it each month catches problems the P&L can't show.
The three parts
- Assets: what the practice has. Cash in the bank, money owed to you, inventory, equipment.
- Liabilities: what the practice owes. Credit card balances, loans, payroll taxes not yet paid, prepaid memberships you haven't earned yet.
- Equity: what's left for the owner. It includes everything you've put in, everything you've taken out, and the profit the practice has kept over time.
Assets always equal liabilities plus equity. That's why it's called a balance sheet.
What I look at first
Cash. The bank balances on the Balance Sheet for the last day of the month should match your bank statements for that day. If they don't, the books aren't reconciled yet, and nothing else on the page can be trusted. Here's what reconciled means.
Credit cards. The balance should match the card statement, and it shouldn't keep climbing month after month without a plan.
Loans. The balance should drop each month as you pay principal. If it doesn't move, payments are being recorded wrong.
Money members owe you. If you invoice employers, this shows what's unpaid. Old amounts that never go away need a call or a write-off.
Things that shouldn't be there
- An uncategorized or suspense account with a balance. That's money nobody has explained.
- Negative cash, or a negative credit card balance that isn't a refund.
- Old payroll tax liabilities. If taxes were paid but still show as owed, the payroll entries are off.
- A loan you paid off that still shows a balance.
A made-up example
A practice shows $48,000 in cash, $9,000 on credit cards, a $30,000 equipment loan and $12,000 in prepaid annual memberships. The cash looks healthy. But $12,000 of it belongs to members who've paid for months you haven't served yet, and the card balance is due this month. The cash that's free to use is closer to $27,000. The P&L would never show you that.
If you collect annual memberships up front, this post explains why part of that cash isn't yours yet.
What I'd do this week
- Open last month's Balance Sheet next to your bank and card statements.
- Check that cash and card balances match.
- Look for any uncategorized, suspense or ask-my-accountant account with a balance, and ask your bookkeeper what's in it.
Common questions
Why does my equity look negative?
Usually because you've taken out more than the practice has earned so far, which is common early on. If it keeps getting more negative, look at your draws against your profit.
Does a strong Balance Sheet mean I'm profitable?
Not on its own. A loan can put a lot of cash in the bank without the practice making money. Read it next to the P&L.
How often should I look at it?
Once a month, after the books are closed. Comparing it with the month before shows you what changed.
Want a Balance Sheet you can trust?
We reconcile every account before we send your Balance Sheet by the 15th, so the numbers on it match your bank and card statements. If that's what you need, apply to work with us.