Get in Balance with Your Balance Sheet

Business owners often say they want to have a cash reserve, collect on receivables sooner, pay down accounts payable, and pay off credit cards. Does this sound familiar? If so, then my question is: Why does everyone spend so much time obsessing over the Profit and Loss, aka P&L?

Don’t get me wrong. I too spend much of my time analyzing my company’s P&L. I compare my prior year’s earnings with this year’s earnings. I make sure my budget-to-actual is in line. I compare my earnings and direct expenses with my company’s projections. However, if I truly want to know how my business is doing, I spend time with my balance sheet.

I believe the answer to my first question, why so many business owners only spend time with the P&L, is that they don’t know how to interpret the story of the balance sheet.

A balance sheet is a record of company assets and liabilities. Assets are what your company owns. Liabilities are what your company owes. Equity is what your company has.

3 Ways to Spend Time with Your Balance Sheet

 1. Evaluate your company’s liquidity. How quickly can you turn your company’s assets into cash? Current assets (CA) determine liquidity. Current assets are made up of cash, accounts receivable, and inventory. Cash is the most liquid and inventory is the least.

Take the sum total of your current liabilities (CL) combined with current payments on long-term debt. Current liabilities include accounts payable, credit cards, payroll payable, taxes payable, etc. Calculate your current obligations on long-term debt for the month (car notes, mortgage, and equipment finance loans) and add to your current liabilities.

Now that you know how much you have in current assets and how much you owe in current liabilities, divide current assets by current liabilities. Coverage of assets to liabilities should be at least 1.25. Example: Current Assets = $1,000 Current Liabilities = $460. CA/CL = 2.17. If assets to liabilities is less than 1, there could be a cash-flow problem.

Basically, if a company generates more liquid assets than operational costs, it can give the excess to the shareholders/owners. At some point in the future, the company may end its operations. It will pay off all liabilities and what remains is tangible shareholder/owner value. This is the return on invested capital/sweat equity generated by the company’s operations.

This step also identifies if the company can fund its own growth, or if debt will need to be issued to the company to support growth.

2. Determine whether liquid assets are increasing or decreasing. How about your payables? From one month to the next review the change in cash, accounts receivables, inventory, payables and credit cards.



**Note: The chart above is a very basic analysis, but hopefully you can start thinking about the relationships between accounts.

3. Employ tactics to control cash. Going back to the first sentence of this article—businesses want to have a cash reserve, collect on receivables sooner, pay down AP, and hopefully pay off the credit cards. Are these goals attainable? Yes! Let’s start with the need to have a cash reserve.

As a business owner, what are you doing to control cash? Is there a budget in place to control expenses? Are expenses realistic? For example, you don’t lease a luxury auto that the company cannot afford. Is the company collecting AR in a timely manner to pay for operational costs? Do you maintain credit card debt and have a plan in place to pay off the debt? Do you separate expenses for your life from your business? If you answered yes to any of the above questions, you are on your way to having a cash reserve and getting in balance with your balance sheet.

Beth Bockenhauer started her career with five years of military service. She then worked for ten years as a small business owner, and holds a Bachelor of Science degree in accounting. Beth has worked in public accounting for the past seven years. Her company, Beth Bockenhauer, CPA is dedicated to helping business owners establish beneficial financial systems and processes, and to wisely manage growth as well as budgets.