What is a Balance Sheet and Why Do I Need It?
As a realtor you have been trained on the importance of the income statement, and in many cases that is the only thing you have tracked. Until the PREC became an option, many realtors were trained by their tax preparers that this was the only information that mattered. That is just not true.
Your profit is important, there is no doubt, but that is a snap shot of the period, whether that be the month, quarter or year. At the end of the year, it restarts at $0. Where is your value and how do you assess it? That is where the balance sheet comes in.
Your balance sheet is where you find your accumulated wealth. The balance sheet is a running value that never resets. You can look at it on any day and determine what your wealth is up to that day. It is a very powerful statement.
If you think of it another way, when you have a potential home buyer, one of the processes they go through is determining their net worth. To do this they add together their bank balances, investments, hard assets owned (for example their car or current home), and then subtract from that their debt, such as credit card balances, current mortgage, vehicle loan, as well as amounts currently owed (hydro, property taxes, etc). This then provides their net worth. Your balance sheet does the same thing.
In the case of your business and the balance sheet, we expand on the above. With your balance sheet we also look at including commissions on closings that have happened, but you have not yet been paid for, and also any amounts owed to the government (such as HST, personal/corporate taxes). In addition, your current year profit is added and we can then determine what your business wealth is at this moment.
When looking to tax plan, retirement plan, estate plan, purchase investment properties, etc this becomes a very important aspect of our discussions with you.