MBA Boot Camp: The Balance Sheet (2.3)

Concepts & Vocabulary

• Asset: Anything of value that a company owns (cash, inventory, property, equipment, patents).

• Liability: Anything that a company owes to others (bank loans, unpaid bills, mortgages).

• Equity: The owner's claim after subtracting liabilities from assets. (Also called Shareholders' Equity).
  

Core Lesson: The Snapshot in Time

If the Income Statement is a video recording, the Balance Sheet is a photograph. It shows the financial position of a company at one exact moment in time.

It is based on the single most important equation in accounting: Assets = Liabilities + Equity

Think of buying a house. If you buy a $400,000 house (Asset), and you take out a $300,000 mortgage (Liability), your personal Equity in the house is $100,000. $400,000 (A) = $300,000 (L) + $100,000 (E). The two sides must always balance.

For a business, Assets are broken down by liquidity (how fast they can be turned into cash). Cash is at the top, followed by inventory, and ending with big things like buildings. Liabilities are broken down by when they are due (short-term bills vs. 10-year bank loans).

Library Reflection

Many library directors (and boards) that I’ve talked with aim to spend all their annual money by the end of the year, because they believe that is the best way to show the finance committee that they need more money next year. They imagine hearing this question from the finance committee: How can you request more money when you didn’t spend the money we gave you last year?

It’s a good question. But I’ve never viewed a zeroed out Balance Sheet as a good goal, because it inhibits your flexibility. Any money that you take in as revenue at your library, belongs to your library going forward. The city can’t take it back.

This can come in handy at the end of the year. If your financial structure is sound, you can think about splurging on a project. This extra spending in turn helps to improve county reimbursement (in Wisconsin) because the funding formula is tied to an abstruse funding formula that involves total expenses and the circulation from cardholders without a home library (i.e. mostly townships/villages, because their taxes don’t already fund any particular library). This shows that understanding how the finacing works with your city and with your county will help your make smart decisions with your monthly expenses.

It also helps you plan for the future. I always focused spending the local city money on foundational or fundamental expenses (i.e. the building, utilities, the staff, supplies, materials). Then I looked to raise money for programming, innovative projects, renovations, etc. That way, you can continue to ask for more money from the finance committee, because it general it is tied to paying for infrastructure, inflation-impacted supply costs, and staffing. They see you working hard to pay for all the extra stuff, so there is incentive to continue that model, and, in my opinion, reward you for your hard work.