Inventory Genius Method: A Strong Balance Sheet

Continuing in the Inventory Genius Method series, this week we're diving into the balance sheet. A strong balance sheet is a crucial part of any business. And for inventory based business owners, it can be tricky to figure out how inventory fits into the balance sheet.

As we get deeper into the Inventory Genius Method series, keep in mind that every story you'll read is real, and every business journey is a lesson for you as you make your way forward on the path to profitability. We have so much to learn from one another as business owners. I'm grateful to each of my clients who've been open to my sharing their stories and lessons in entrepreneurialism.

You can print these posts and highlight sections you find especially important. Or, you may just decide to take notes. Be sure to write down questions as you have them and reach out to me when you are ready for the next step or to share your realization moments with me. I want to celebrate your wins and applaud your efforts as you work to become an Inventory Genius!

Now, let's take a deeper look at the importance of a strong balance sheet and how you can ensure your inventory based business is on the right track. 

You cannot become an Inventory Genius without understanding how inventory fits on the balance sheet. 

Recession. Pandemic. Technology. Entrepreneurship is a rollercoaster. The businesses that last through the hard times and endure the rough patches are those with a strong balance sheet. What does that actually look like? A strong balance sheet shows cash in the accounts, assets that are correctly accounted for, and no debt. 

We all know and love Dave Ramsey for the advice he gives families and individuals about becoming financially free in their personal lives. 

But do his teachings apply to business as well? They sure do! In fact, Dave Ramsey says, “Debt magnifies your mistakes, kills your cash, and puts your business’ very survival at risk. It should be avoided at all costs.”  

We have already talked about debt magnifying your mistakes (remember the conversation about borrowing for relief only to find yourself in an even deeper hole). 

We have talked about debt killing your cash (remember the overview of how profit can quickly be eaten up by debt payments). 

Now let’s talk about debt putting your business survival at risk and why a strong balance sheet is the key to weathering any economic storm. 

First, let’s make our way down the balance sheet and talk through how inventory fits into the picture. 

At the top of any balance sheet, you will see a list of all your cash—checking accounts, savings accounts, even cash balances. Balances held in payment processors like PayPal and Stripe will also show up at the very top of the balance sheet. I am sure you have heard the statement, “Cash is king.” Ever wonder what it means? You want that king to be strong and positioned well for any battle. The more cash you have, the more opportunities you can lean into, such as paying up front for memberships so you can get a discount, having cash you can use to buy out the competitor when their unbalanced sheet gets the better of them  and they decide to close, or snatching up off-price and liquidation inventory at a moment’s notice and using that amazing buy to improve your margin. These are only a few things cash can do for you. Have you ever thought to yourself that people with money always make more money? It is because of cash. When you are not strapped for cash, possibilities for making more will always be available to you. 

Next on the balance sheet would be any assets you own. Assets are things that add value to your company or that can be sold, such as furniture, equipment, vehicles, or intangible assets like trademarks. A common mistake business owners make is adding purchases like these to their expenses. Did you just trademark your business name? That trademark is an asset. Add it to the balance sheet. Did you purchase a new point-of-sale system? Make sure to put it on the balance sheet instead of turning in the receipt and expensing it on that month’s profit and loss statement. 

On the balance sheet, you will find “Accounts Receivable” if you carry those in your business. Accounts receivable is essentially cash that is owed to you by someone else. Since it is something that will turn into cash for you, it is an asset. Anything you own or is payable to you should be in the asset section. 

Finally, there is inventory. 

Remember when we talked about Jane and how her accountant had misrepresented her margin? The reason I knew to head right over to the balance sheet is because so many bookkeepers do this with inventory. We may never know if this is due to laziness, misunderstanding, or for some other strange reason, but it is common for me to see a client’s bookkeeper expensing inventory purchases instead of taking the time to enter that inventory onto the balance sheet first and then expense it out as it sells. 

As a product-based business, your inventory is most likely your biggest asset (unless you have mountains of cash or large equipment). As such, it is imperative that your inventory is represented accurately on your balance sheet. May I rewrite that sentence and highlight in bold? 

As a product-based business, it is imperative that your inventory is represented accurately on your balance sheet.

When an inventory purchase is made, that receipt’s first stop is the balance sheet. Accurately record the total value of that inventory, and as you make your monthly entries, subtract the cost of goods sold from your total inventory asset value. Finally, move that cost of goods sold over to the profit and loss statement under the total sales for the month. This simple accounting practice will ensure that your inventory value is always accurately listed on your balance sheet, and your margin is always represented properly on your profit and loss statement. 

Let’s make our way down to the liabilities section of the balance sheet. 

Credit card balances, payable loans and accounts, owed sales tax, and outstanding gift cards are all things you owe to someone else, and they all live in the liabilities section of the balance sheet.  

A strong balance sheet is heavy in assets and lean in liabilities. With this, you can make good choices, seize opportunities, and survive when times are slow or legal bills are mounting. 

The bankers came to do a final walkthrough of our home before we handed over the keys. Looking back, I can see that this is definitely not standard practice, but they were angry, and I guess we all do strange things when we feel vengeance is ours to take. I told my husband I couldn’t show up for that appointment.

I had been answering calls from collectors for months. Communicating honestly was important to me. If I could come out of it with at least my reputation, I would feel that it was some sort of warped win. I did a lot of very hard things in the months between the first franchisee exit and closing the doors to the last store, but I simply couldn’t face those bankers walking through the house, opening cupboard doors, inspecting every inch of where we had been living. I was too exhausted, and it was too humiliating. There were two things my amazing husband did alone during that horrible season of my business life: he took our wedding rings to the pawn shop, and he walked through our home with the bankers. 

Remember, just a little over two years before I had been on a plane to the White House and accepting awards and accolades from national associations. And now we were filing for bankruptcy and losing our home. 

We had a weak balance sheet. 

I want you to reread the three paragraphs above. Then I want you to read them one more time. I never thought this would happen to me, and I never want it to happen to you. I am recording this part of my story here because I want to jar you awake. I want to shock you into realizing you have to stop playing “store” with your business. 

Building a strong balance sheet isn’t just a suggestion or an idea to consider. It is crucial that you start working tirelessly today on building a strong balance sheet. You don’t know what is around the corner—a pandemic, a recession, or a mountain of legal bills. And when that storm decides to roll in, it may be too late if you have not been preparing. You need to start now if you want a reserve of cash, an accurate recording of what you own, and no debt. With a strong balance sheet, unforeseen circumstances of any kind, while uncomfortable, won’t sink you because you will have built a strong foundation.

If you're looking for next steps beyond these blog posts, I invite you to get started with the Quickstart to Inventory Genius. 

The Quickstart to Inventory Genius is my keystone coaching roadmap. Three modules will quickly layout five things to focus on in your inventory based business. You can implement these five strategies right away in order to drive immediate profit. And with the Quickstart, I GUARANTEE that you'll double your investment through either making, saving, or finding that amount in PROFIT. The Quickstart really is the perfect way to get your inventory based business on the right track.

You may also consider joining the waitlist for my top tier mastermind program. The Profit Accelerator Mastermind is a profit strategy program that delivers amazing results for all types of inventory based business owners. It's a chance to work one on one with me and to dive into cash flow, debt management, and the profitability of your business. Interested in learning more? Join the waitlist here.

And if you want to dive deeper into the resources on my website, I hope you'll tune into The Inventory Genius podcast. The podcast is a one stop shop created just for product-based business owners. In the weekly episodes, you'll learn about all things inventory, time management, profit planning for retail, and more. You'll hear a variety of interviews, deep dive conversations on the nitty gritty bits of business ownership and a few fun and random episodes along the way.

And if you've made it this far, you obviously know about the blog. It's packed with invaluable information across a variety of topics. Looking for posts related to this one? 

→ Four Part Simplify Business Series  - A four part series where I tackle common inventory based business questions. I use my Inventory Genius Method to break the answers down into simple steps. These bite-sized, actionable steps give you one task at a time to understand, complete and implement in your own business.

→ Inventory and How it Works in Your Business  - Learn why and how your inventory is directly connected to your business' profitability.

Take a closer, more in-depth look at the three key things you can do if you know the numbers on your profit and loss statement are accurately recorded, yet you still find a net loss when you scroll to the bottom:

→ Increasing Sales  - More money on the bottom line. More cash in the bank account. A paycheck for you. All three of these goals can be achieved by increasing the top-line sales.

→ Increasing Margin  - You won’t simply be guessing, buying, guessing wrong, marking down, and repeating this ugly and unproductive cycle. You will be buying smarter, and buying smarter means more margin.

→ Decreasing Expenses  - Understand your numbers, so you can make wise choices about growth. Focus on managing your inventory, so it is working for you, writing you a paycheck from day one.