Home » How – and Why – To Boost Your Business Balance Sheet
If you are a small business owner, growing your business is, of course always going to be one of your most pressing top of mind concerns. However, understanding just where your business is at RIGHT NOW, is equally as important. A balance sheet can help you do that.
Your balance sheet provides a snapshot of your current financial situation at any given time. Your liabilities (accounts payable, credit cards, loans, mortgages, vehicle financing, income tax, and employee wages), assets (cash, accounts receivable, inventory, investments, and equipment), and shareholders’ equity are all taken into account.
A good balance sheet lists your assets and liabilities and offers an easy to understand overview of just where your business stands right now. Or at least it should.
To reveal how solvent your business is, you can look at a few ratios. The first divides your assets by your liabilities, the second focuses on your cash (as opposed to your inventory).
This calculation is quick and simple: Use the Current assets and Current liabilities listed on your balance sheet to see your asset-to-liability ratio. For example, you may have $2 in cash and accounts receivable for every $1 of accounts payable, tax owing and credit card debt you owe. This is also known as liquidity, which helps explain the business’s ability to pay its near-term financial obligations.
Current Assets divided by Current liabilities = Current ratio
If you had to liquidate all of your assets tomorrow, would you be able to pay down all your debts? How much would you have left over?
Debt coverage ratio
Enter the debt coverage ratio. This figures out if you have enough quick money, or ready cash, to pay bills if your creditors needed payment immediately.
(Current assets – inventory) divided by Current liabilities = Debt coverage ratio
To do this calculation, subtract your inventory or stock from your assets figure. Then divide this number by your liabilities. You’ll never want this ratio to dip below 1:1.
How much financing has your company had? Each time you get a loan, this increases your total liabilities. Shareholders’ equity is the amount of funds investors have placed in the business, plus all historical company earnings.
Liabilities divided by Shareholders’ equity = Debt-to-equity ratio
If this ratio is high, it shows that your company has borrowed a lot of money, and is not yet making more than you are borrowing.
The benefits of analyzing and strengthening your company’s balance sheet are numerous. You can get a clear picture of your finances and optimize your cash flow. It also assists you in deciding whether to hire employees, acquire investors or take on debt.
Here are some ideas for strengthening your balance sheet:
Shift your inventory. If you have slow-moving inventory, you might want to sell it, or bundle it with more popular items to help move it. If you decide to write off this inventory, make sure to choose the right time of the year to do so. The faster that you can turn over your stock, the more efficient your business and inventory management will be.
Improve your debt-to-equity ratio. You can achieve this by bringing in more sales, or unloading assets such as office equipment or real estate. Besides improving your cash flow, boosting this ratio will put you in a better position to grow and raise capital.
Cut the cash going out. How can you reduce your overhead on everyday operations? Strategies may include looking for new vendors, scaling back on non-necessities, streamlining marketing or outsourcing business tasks.
Set up your emergency cash reserve. One trick is to put one-third of your cash on hold to use in the case of an emergency (or to take advantage of unexpected opportunities).
Manage your accounts receivable. Unpaid bills put pressure on your cash flow. Focus on managing your accounts receivable to ensure you are paid. For example, are you tracking your sales invoices in Excel vs proper accounting software? Who is actually in charge of making sure that invoices get paid, and in a timely manner? These are questions you need to answer, and make the right changes as needed.
How to make a balance sheet
A note for sole proprietors
Some sole proprietors don’t really need a balance sheet, since there is no separation between the person and the business. However, that can often be a dangerous situation to be in, both personally and professionally. Check out our blog here that explains more about why that is.
A balance sheet offers important insights into your business, so depending on your needs, you may want to create one yearly, quarterly, or even monthly. (We can help with that!)
At K.K. Chartered Professional Accountants, we help small business owners set up a foundation for success and thrive. Book a meeting with one of our knowledgeable CPAs so we can look at the numbers, give you the low-down on how your business is doing, and create a plan for growth.