Understanding the Equity Section of Your Balance Sheet

When you look at your balance sheet, the "Equity" section might feel like the most mysterious part. But it’s actually one of the most important!

Equity represents what you own in your business after subtracting what you owe. It shows your business’s value over time. This includes your original investment, profits that have been kept in the business (called retained earnings), and sometimes distributions you've taken out.

Why it matters:

• Financial Health Check: Equity growth generally means your business is becoming more valuable.

• Loan Applications: Lenders and investors look at your equity when deciding if they want to work with you.

• Owner Pay Decisions: Understanding your equity helps you decide when it’s safe to take a distribution.

Tip: Keeping your equity healthy is like building a strong foundation for your future growth. Watch it – and protect it – just like you would your cash flow.