I will never forget a conversation over lunch one day with my close friend Murray, a successful distributor of shipping materials. During our chat, Murray told me that he didn’t care about accounting and financial statements—all he wanted to know each month was how much cash he had, how much inventory he had on hand, how much was owed to him and how much he owed. If his inventory and the amount that was owed to him was larger than his bills, he had made money. Simple! What Murray was talking about is a simplified accounting system (known as a “current equity report”) that a New York merchant had taught him when he first started out in business. This simple system told Murray if he had made or lost money each month. This is how it works. At the end of each month, he would add what was owed to him (his accounts receivable), his inventory and cash and then subtract what he owed (his accounts payable). The result of this addition and subtraction was his “equity.” If the equity at the end of the current month increased over the prior month he had made a profit. A decrease meant he lost money. If you study the example below, you will see how Murray’s system worked. From month one to month two, the total of cash, accounts receivable and inventory increased by $6,000, whereas the liabilities (debts) increased by $1,000. The net result was a gain in equity of $5,000—or in other words, a profit. Murray’s Equity Report: An Example ITEM--------------------MAY ($)------JUNE ($)-----DIFFERENCE ($) Cash----------------------$ 3,000------$ 2,000 Accounts Receivable--------------$16,000------$22,000 Inventory-----------------$19,000------$20,000 TOTAL--------------------$38,000------$44,000-----+$6,000 Accounts Payable------------------$28,000------$29,000-----+$1,000 Equity--------------------$10,000------$15,000-----+$5,000 In my courses on entrepreneurship, I stress this approach to those who do not have a background in accounting as a means of quickly determining profitability. (For those of you knowledgeable about accounting, you can see that I have taken a liberty with the term “equity,” as I have purposefully omitted anything beyond current assets and liabilities.) The report is easy to prepare and should be done at the end or beginning of every month. Whichever time period you elect (for example, the first or the last day of the month), be consistent. First, add up your business bank accounts including all your checking and savings accounts. With that task completed, total the amount your customers owe you (every month you must prepare a list of customers and the balances owed to you). Now, prepare a total dollar value of your inventory (using what you would get if all the inventory were sold). If you do not have inventory records, now is the time to prepare them. Add up those three items: your cash, your customers’ balances and the value of your inventory. These are the items on the plus side. From this total, you’ll subtract all your bills from suppliers, operating expenses (such as utilities, rent as well as other items such as taxes) and other monthly payments you must make. The difference is your equity. It is the amount of cash on hand after selling all of your inventory, collecting all the monies owed to you by your customers and paying your current bills in full. Remember, if the amount of your equity is increasing, you are earning a profit. (Let your accountant worry about the taxes and you worry about your business surviving.) The purpose of the “equity report” is not to replace your traditional financial statements, but to give you a simplified shortcut to make sure you are immediately aware of your profits or losses of the prior month. Copyright 1999-2001 Paul E Adams Dr. Paul E. Adams is an entrepreneur, Professor Emeritus Ramapo College of New Jersey and the author of Fail Proof Your Business: Beat the Odds and be Successful.