“You’re not going to be able to get a loan. You have negative equity.”
Embarrassed, confused and disappointed, Frank Lunn felt small looking up at the banker wondering what he could do next.
Fortunately, the banker had the young entrepreneur’s best interest in mind. So he explained that even though Frank’s business was making plenty of sales, it wasn’t worth anything on paper.
The banker pointed to the paper.
“You see this number? These are your assets. That is how much everything you own is worth. Now, look at this number. These are your liabilities. That is how much money you owe to others. And if you subtract the liabilities from the assets you get a negative number. That means you have negative equity, which means even if you sold everything you owned, you would still owe money. That’s what it means to have negative equity.”
With this quick explanation, frank was exposed to the basic accounting formula that every business owner should have an understanding of.
Assets = Liabilities + Equity
What He Didn’t Know
It was a painful realization for Frank to realize his business was worth less than he thought. On top of that, it was a major disappointment he didn’t get the loan he was hoping for! But on top of both of those letdowns, Frank was most frustrated with something else.
He didn’t know.
He didn’t know the true picture of his finances, and didn’t know what it was going to take to get a bank to work with him. Quite simply, he had no clue where he stood.
He felt embarrassed, and he felt like this was a problem. Someone should have taught him this stuff.
Learning the Hard Way
Since then, Frank was determined to find the accounting knowledge and key relationships he needed to always know where he stood. It took time and effort, but since then he has been a highly successful entrepreneur, starting and building several businesses.
After hearing Frank’s story, I set out to talk to a banker and a CPA – people who are working with small businesses daily on their financials. I sought to find out if Frank’s story was common or a rare circumstance.
The answer: It’s common. Way too common.
“A lot of businesses just don’t know where they’re at financially,” Brian Davis of First Farmer’s State Bank said.
And with today’s technology and with the amount of people available and ready to help, there is no excuse.
This is an excerpt from a Special Report, Raise Your Business Financial IQ. To read the rest, with expert advice on how to become literate in business financials, download at the link below.Download Now