When I first started out as a dentist who was being paid as a self-employed contractor (back in 1998, I think), I realised I needed an accountant because I couldn't submit my own accounts, because I'm terrible with these things.
And then I got a set of accounts delivered. And they had a balance sheet associated with them. And it might as well have been written backwards in Chinese.
At that stage, there was absolutely no need or point in my understanding anything to do with a balance sheet or what a balance sheet was for or what it meant. Because I was a self-employed contractor and effectively all I did was “ate what I killed”, submit the accounts, pay the expenses, calculate the tax, and the rest.
That was pretty much it.
It was easy living. Simple, not very long-term, but I was young.
This happens to a lot of people, and then they stay in this place, stuck in a furrow, not able to get out. Not able to understand how finance actually works, even for a subcontractor, but more particularly for a business itself.
Later I would become a limited company, a limited company contractor.
Which basically was done as a way of mitigating tax (avoiding tax), but then later, I would end up with multiple businesses. As we still have, and we'll probably grow to have more. And so, the point of a balance sheet and understanding a balance sheet is really about opportunities and protection.
If your balance sheet is strong, i.e. you have lots of assets which are available if you need them.
You are safe.
Imagine the strong balance sheet company. As COVID struck, for example, McDonald's.
Imagine the weak balance sheet company as COVID struck, for example, the Campbell Clinic Group (heading towards 0). In that situation, the Campbell Clinic Group scrambles and scratches and claws to try to stay alive. Trying to grab any opportunity that exists, living in a world of panic.
The strong balance sheet company, they look for the opportunity in the crisis.
And so, for that reason, overleveraging yourself (too much debt). Absolutely reduces the opportunity to take the next opportunity. Whenever it arises.
Balance sheets are safe in a crisis. It gives you the opportunity to sit back and carefully consider what your next move is, if they’re strong. Balance sheets are agile, if they're strong, allowing you the opportunity to take the chance for something better where it flashes past. Because you're in a position to do so.
We get to this situation by understanding the money in our business. And understanding the cash flow and the production of cash in our business. And understanding how to control our costs.
We don't get to that by paying the invoices at the end of the month and seeing how much money is left in the bank and then going to buy a new car.
If you have a business, you have a responsibility to look after the people within the business and the people that you serve. And therefore, you have a responsibility to know the numbers and to look after the financial situation of the business, to allow it to move forward and flourish.
To think that everything that's left at the end of the month is yours. It's not just negligence; it's verging on immoral. You are effectively stealing money from other people.
Because not everything that you make in the business can you take from the business.
Understanding the necessity of a strong balance sheet. And the safety and the opportunity that that creates is one of the first things to understand in running a business (or a house).