Your favorite number on the balance sheet might just be Cash. It’s easy to understand and something every business has. But there is a more meaningful number, at least in the long-term sense, and that’s equity. Below, we’ll dive deeper into this part of the balance sheet.

The Equity Section

As a reminder, the balance sheet has three major sections: assets, liabilities, and equity. When it comes to equity, the accounts displayed depend on the type of entity of your business. Your business could be a sole proprietorship, a partnership, a corporation, or something else. In this article, we’ll focus on the example of equity in a corporation.

Every corporation should have at least three equity accounts:

1. Stock.

This account should reflect the amount of stock issued by the corporation. The amount and price of each share are usually detailed in the Articles of Incorporation, which is the initial legal document of the corporation. For example, if the amount of shares the corporation can issue is 100,000, and they have a par value of $.01, then your stock account balance should be $1,000, which was paid in by cash by the corporation’s owner(s).

This account might also be named Capital Stock, Common Stock, or something similar. This account’s balance typically doesn’t change much over time for a small business. It’s only when new stock is purchased (issued), sold, retired or repurchased by the corporation that the account will see changes.

2. Additional Paid in Capital (APIC)

Additional Paid in Capital occurs when investors and business owners pay in more than the par value price of the stock. The balance represents the difference between what owners/investors paid into the company and the par value of the company stock.

3. Retained Earnings

Retained Earnings is where the action is and it is an important number to understand. It’s the accumulated earnings of the company less any dividends paid to shareholders over all time that the business has been in existence.

For a small business, retained earnings will change once a year at the end of the fiscal year when net profit (or loss) from the current year is rolled into the retained earnings account. At this time, all of the income and expense accounts are zeroed out to start over for the new year, and the balance (which is profit or loss) is added (or subtracted, in the case of loss) to retained earnings. Your accounting system automatically does this for you, and you can check it out by running a balance sheet as of the last day of your fiscal year, then running a balance sheet on the following day – the first day on the next fiscal year and comparing what changed.

You can reconcile retained earnings by adding up all of your profits and losses for each year you are in business. Then subtract any dividends paid throughout the years, and you should come out with your retained earnings balance. You can have a negative retained earnings balance.

The retained earnings number is a measure of the long-term value of the business. It also plays a large role in determining your basis, or investment, so to speak, in the company, which is used for tax purposes.

An S Corporation will have an additional fourth account in its Equity section.

4. Distributions

Distributions represent the money that the S Corporation owner has taken out of the business. This money is over and above the salary that is paid to the owner. It must be tracked for tax purposes, which is why it has a separate account on the balance sheet.  In simple terms, distributions are generally not taxable as long as the owner has enough basis to cover them. In this way, distributions are different from dividends that are issued in C Corporations, since they are taxable.

Last, if you run a balance sheet report in your accounting system on any date during the year, you may see an additional account:

5. Current Year Earnings

This is the sum of all of your income and expense accounts. It should be the same number as net profit or loss on your income statement from the beginning of the year to your balance sheet date. On a formal balance sheet for external purposes, this number is rolled into the retained earnings account.

The equity section can be the most difficult section to understand on the balance sheet. Hopefully, the explanation above will provide a bit more clarity as well as shine a light on the significance of the retained earnings balance.

Every business has competitors of some kind, and in most industries, it’s crucial to know what your competition is up to in order to ensure your own products sell. A great deal of information can be gleaned from researching your competition’s online presence, but there’s another tool you might consider adding to your marketing toolbox: a mystery shopper. 

A mystery shopper is a trained observer with significant customer service experience who is hired to shop your competitors. Their sole purpose is to share information with you about their shopping experience. While most of this article will focus on the example of mystery shopping at brick-and-mortar retailers, the tactic can be useful beyond this specific industry from professional services to health care, real estate, restaurants, and beyond. You can also adapt the idea to industries such as construction and manufacturing.

Mystery shoppers provide value by helping you collect intel you can’t determine from an internet query, like the shopping experience, quality of products offered, or accessibility. This data will help you perform a Competitive Analysis – a report on who your competitors are and what they are doing, informing your business of where it can (or already does) stand out. A competitive analysis report should be part of your marketing plan, as it can help you optimally spend your marketing dollars.

Let’s say you own a fabric store and want to know what other stores in your area are doing. You can make a list of a few fabric retailers in the three zip codes around you, providing that list to your mystery shopper, who would visit each of the stores. You could also provide your mystery shopper with a list of questions or a checklist of what to observe and/or purchase. The mystery shopper will take detailed notes about their experiences at each retailer and report their findings back to you.

From your mystery shopper’s notes, you can determine a variety of things, like:

• how their storefront looks and what their curb appeal is.
• if it was easy or not to find parking. 
• what their opening hours are and do they open on time? Is there a queue of shoppers waiting to get into the store? Are you required to schedule an appointment to use their services? 
• Did employees provide a greeting when entering the business? How friendly or approachable are the employees?
• How does the store look? Is it crammed full of items or sparse?
• What kind of displays do they have and how attractive are they?
• Is their inventory broad, deep, or both? What type of items and brands do they carry compared to your store? Are there brands, items, or product lines your company should be carrying?
• Were there a lot of customers in the store? How long were the checkout lines?
• How clean is the store? Do you feel comfortable with the level of cleanliness?
• Taking a sample of items and comparing pricing, how does your company’s selection stack up?
• What was the purchase experience like? Were you offered an upsell or a coupon? What does the checkout area look like? Were customers offered a bag for their items?
• What was it like to return an item? How strict is the return policy, and was the service friendly or hesitant?
• For service providers, does their waiting area look inviting and professional? What do their service areas look like?
• Was there any follow-up, such as an email promotion or thank-you note?

Once you have compiled the information on your competitors, you can look for ideas to improve your business that align with your brand and culture. These improvements are often in the area of customer service, but can also include adding inventory, updating hours and availability, adding store features or sales events, and more. You may even be able to find ideas to implement at a lower cost than your competitors, giving you an edge on profits.

Now, where can you find a mystery shopper? You can hire individuals or a company that specializes in providing this service. While many business owners might consider asking a friend to mystery shop in an effort to save money, a friend might not be able to articulate their experience with the detail you need, or they could fail to observe important aspects of the shopping experience.

So, consider recruiting a professional for the job. You’ll need a budget to pay the shopper(s) for their time, plus funds to make any purchases on your behalf. But hiring a mystery shopper can be well worth the investment, as it provides valuable access to your competition.

Whether we’re headed for a recession or not, it’s always a good time to squeak out more profits from your business books. We’re not talking about drastically slashing expenses or spending a lot to raise revenue; the tips in this article are long-term ideas to lift up your profits gently.

Timing on Capital Purchases

The timing of asset purchases, such as equipment, a truck, or even a PC, can be tricky. Understanding the best timing for asset purchases and replacements can make a difference in your profits.

When purchasing a new asset, gain a good understanding of the return on investment so that you’re prepared from a cash flow standpoint. With more complex businesses, it’s a good idea to hire an accountant who knows your industry and has capital expenditure experience.

When replacing an asset, it should be timed so that the asset is replaced before you have to begin spending a lot on repairs, but not so soon that you maximize your use of the current asset. 

Rent and Utility Contracts

When rent and utility contracts come up for renewal, it’s time to negotiate. If your landlord hasn’t fixed something, you can at least use this as an opportunity to have the discussion and hopefully accelerate the repairs.

For certain utility contracts, like internet and phone, the price will often increase when your contract runs out. However, it can also be the best time to ask for a better deal, or even a new customer deal. The adage “it’s always easier to keep a customer than find a new one,” can apply to new carriers, too. Communications companies are constantly creating new deals and packages, so try to jump into one of those to keep your costs from going up.

Profit in Leftovers

What assets do you have that aren’t working for you?  Put them to work!

Here are some examples:

1. Cash – make sure your excess cash is safely invested or at least in an interest-bearing checking or savings account.
2. Extra space – rent out space that you are not using or only using some days. This solution can have many different looks to it beyond the monthly renter. As an example, virtual workers looking for a conference room for a day could be a money-maker for you.
3. Manufacturing firms can sell the scrap from their assembly lines as well as their obsolete inventory.
4. Excess construction materials can be sold, donated, stored for the next job, used on a new small project, or used as firewood.
5. If the inventory on your shelf needs to be dusted, you’ve had it too long. Find a way to move it now, and replace it with something that sells faster.

Training

If employees are wasting time, they are wasting money–yours, to be exact. There are three good solutions:

1. Offer training – perhaps they haven’t been shown what to do correctly or how to do it efficiently. Or maybe they need to break bad habits.
2. Re-energize employees with incentives, new benefits, or motivational training and events.
3. Redesign your processes and automation, then retrain – it could be your workflow needs revamping to make it more efficient. For accounting processes, New Business Directions can help with this!

If these options don’t work, it may be time to face the reality that your employee could be a bad fit. You know what you have to do in that case.

Stop the Subscriptions

Those recurring monthly charges just keep adding up. The average small business uses dozens of apps, meaning they also likely have dozens of $20 to $50 automatic monthly charges going on a credit card somewhere in your business. This includes magazines, memberships, dues, conferences, newsletters, gadgets, and software.

If you’re making a lot of money, you may have trouble finding the time to research what subscriptions you really need versus what you don’t. But in the long run, you will retain more revenue sooner if you sit down and examine this area of spending. Stop the $20 to $50 madness by reassessing what subscriptions you really need and then either opting for the annual subscription discount or canceling the apps that aren’t essential.

ClickUp™ is a versatile new web application that functions primarily as a project management tool, and serves multiple other functions for small businesses and is adaptable across several industries.

ClickUp’s goal for its users is to save time and reduce redundancy by tying everything together in one app. Its integrations, which are called ClickApps, are truly its strength. The 1,000+ integrations set ClickUp apart from other offerings, and for this reason, ClickUp excels at automating processes that use multiple apps, including hard-to-automate processes like customer onboarding.

Some of the functions people use ClickUp for include reminders, goals, whiteboards, templates, calendars, document flow, task management, dashboards, marketing processes, and team collaboration and communication.

One feature frequently mentioned is the ability to create custom views exactly the way you want them. Views provide a summary of your work and come in many flavors. You can create task views, list views, boards, calendars, Gantt views, workload views, and box views.

If ClickUp has any weakness, it could be the fact that it’s a blank slate. Because the platform is so versatile, it can be used across many different industries. However, users should really spend some time considering their hierarchy of workspaces, folders, and list. You may need to be somewhat tech-savvy to get everything set up. The learning curve can be intimidating, but once you get through it, there is so much power in having everything customized and on one platform.

ClickUp does have a following of power users, and a certification of sorts is offered. Becoming ClickUp Verified means that you’ve earned expertise in the product. If the learning curve is too much for you or your team members, you can hire one of these ClickUp consultants to do the setup for you, or head to YouTube for comprehensive tutorials. 

As of this writing, ClickUp hosts 4,000,000 users, including those using the free version available for personal use. Monthly pricing for business users ranges from $5 to $19 per user, depending on the features you need. Enterprise options are also available.

ClickUp was founded in 2017, is headquartered in San Diego, CA, and has raised three rounds of funding as of this writing. New Business Directions recently implemented ClickUp within our own company, so if you’d like to learn more about why we chose this software, send us an email or learn more at clickup.com.

Pick up just about any public company’s most recent annual report, and you’ll find a section on ESG, or Environment, Social, and Governance. ESG is the trend of not only considering but also measuring a company’s sustainability performance—something that has become key for a new generation of investors who are choosing to be more discerning when selecting companies to invest in.

While ESG is still predominately a matter of concern for large companies, small and mid-size businesses can benefit from an awareness of the trend. Below, we offer an introduction to the ESG components:

Environment

When measuring a business’s impact on the environment, one must consider topics such as climate change and sustainability. This includes questions like, “How many natural resources does the company use, and are they replenishing them as they use them?” and “If the company is creating pollution, how is it offsetting, or working to eliminate, its pollution?”

Social

The social impact of a business is the broadest umbrella of the three categories. It includes many topics, from diversity and inclusion (in the workforce and with suppliers) to consumer protection related to their product. Human rights issues like overseas working conditions, minimum wages, and animal welfare in product research and development also apply.

Governance

The area of governance measures the quality of leadership within the company as it relates to the topics of ethics, transparency, compensation issues for both executives and employees, and employee relations as a whole.

Accounting for ESG

The accounting industry is developing and adopting standards for measuring a corporation’s sustainability performance. As of this writing, the IFRS (International Financial Reporting Standards) Foundation has proposed the creation of the Sustainability Standards Board, which will help set standards for ESG in 140 countries.

This move will better align the current financial performance of a company with the new sustainability measures. However, all of this is many years off, as many organizations have developed standards for numerous components of ESG that need to be consolidated and adopted.

In the meantime, we do know that positive sustainability performance by a company drives positive financial performance. There are many ways small businesses can participate in ESG’s benefits.

ESG and Small Business 

ESG can positively impact your company’s value, culture, hiring process, the vendors you select, and the customers who select you.

For example, if you plan to do business with a large company, mirroring their ESG values can help you align with them, giving you an edge in the selection process. Similarly, when you communicate your ESG values and contributions, you are more likely to attract employees with the same individual values, making for a better fit.

While there are many efforts a small business can make to improve ESG, here are a few ideas to get started:

• Disclose your starting hourly rate, if it’s well above your state’s minimum wage, to attract better-quality candidates.
• When purchasing vehicles, consider electric or hybrid.
• Match employee nonprofit contributions, and give them time off to volunteer.
• Practice transparency when it comes to executive salaries or financial results.
• Write and post a diversity and inclusion statement.
• Conserve electricity by closing off unused spaces, turning off lights when not in use, and switching from gas to electric appliances when possible.
• Optimize service routes to reduce fuel consumption.
• Donate excess food to shelters (in the case of restaurants).
• Protect customers’ private information with privacy processes and policies.
• Make product components recyclable, purchase recyclable supplies, and train employees to recycle.

Add your own ideas to the above list, and ask yourself how your business measures up when it comes to ESG.