09 What are retained earnings and where do they hide on your balance sheet?
As business owners, we are constantly juggling all aspects of preparedness, so it is oftentimes difficult to find the motivation to understand the ins and outs of our balance sheet. Furthermore, things are not always as they appear. However, it is crucial to not only consult the numbers for a peace of mind, it is also important to know what the numbers mean.
It is easy to see the pluses and the minuses only, without learning to distinguish between different types of assets and expenses. It is for this reason that many people are confused about the concept of retained earnings.
Retained earnings are a mythological creature, a point of confusion for business people trying to figure out the difference between retained earnings and an emergency fund. Heck, we all have no doubt we NEED an emergency fund, that one could be the difference between sinking or being able to swim on. But what does one look like? It is important to understand that the assets of your business, the retained earnings, are not always cash. And let’s face it, when it comes down to it, if you ever have a true emergency, you will need cash!
Fear not! I will outline the most effective way to look at your balance sheet realistically, with awareness of your retained earnings and the goal of realistic building of your emergency fund overtime. Don’t stay awake at night wondering where you will mine 3-6 months of non-discretionary cash for your business. Join me to learn the difference between what your assets look like on a balance sheet, and what you actually NEED to weather an unexpected storm.
Once you tune into this installment of Money Morsels, you will be able to answer the following:
-What ARE retained earnings, exactly?
-Is there a connection between retained earnings and the emergency fund? Do I really NEED an emergency fund?
- Why, when looking at my balance sheet, do I think I am looking at retained earnings when I’m not?
- When I use my retained earnings to advance my business, does this mean my gear is part of my emergency fund?
Retained earnings are kind of a fictional element on your balance sheet. You have to know that retained earnings are not a physical presence, there’s not an account for them, or an envelope sitting somewhere.
A #MoneyMorsels not to be missed! Learn more about retained earnings [TWEET THIS]
We all know that on a balance sheet, the right side needs to balance the left side, and both sides must be equal. The easiest way to understand a balance sheet is that “WHAT WE HAVE” is on the left side and “WHO OWNS THAT” is on the right side. In this installment of Money Morsels, I will explain why, although the numbers may SEEM equal, accounts receivable, for example, is not cash. Inventory is not cash. Cash isn’t necessarily retained earnings, because assets aren’t always cash. I will also put your mind at ease in regards to building your true emergency fund over time. Together, we will mine the balance sheet for answers, until retained earnings make good sense!