Pop quiz: Do you know your cash balance? If you’re like most business owners and leaders the answer is yes. You can probably also tick off your operating expenses and your revenues like you could tick off today’s date. Most businesspeople tend to live and die by their P&L statement. Those same people also have a tendency to overlook a critical measure of business health: The balance sheet.
Why Care About Your Balance Sheet
Your balance sheet impacts management decision making across the organization and understanding that sheet can be the key to managing the entire business. When the balance sheet is strong, working capital is flowing, you’re able to borrow for investment and owners are happy with their dividends. When a balance sheet is weak, growth is stymied and profitability suffers.
Your balance sheet can provide you with insights into what’s going well and what might not be working out and the steps you can take to correct issues or ride success. For example, if you’re struggling with sluggish receivables this might be an indication that you aren’t fulfilling customer expectations or that you are engaging in poor credit decisions. These situations should be analyzed regularly and discussed in monthly leadership meetings, and it is important to note that these insights aren’t available in operating statements.
The Business Health Indicators Hiding In Your Balance Sheet
A common mistake many leaders make is keeping their sole focus on profitability. Profits are important, but they are not a guarantee that the business is healthy by any means. Assets must equal liabilities plus equity. Shifts in any direction will have a serious impact on cash flow, and good leaders have a handle on which way the wind is blowing.
Getting the most out of your balance sheet requires monitoring several key ratios:
- Current ratio
- Quick ratio
- Daily cash on hand
- Days of expenses in AP
- Days of revenue in AR
- Debt to cash flow ratio
- Debt to equity ratio
Every company’s ratios will be unique, so you must always evaluate them against your organizational goals, rather than any “set” standards. It’s also critical not to get hung up on any one ratio at the expense of another. Make sure to understand how the effects of one will impact others. The balance sheet should be studied and analyzed holistically.
Being able to see past numbers and read the nuances of a balance sheet takes time, practice and expertise. It helps to have talented accounting and finance staff you can lean on and trust to help you make the best decisions based on the organization’s financial health. If your company is seeking top accounting and finance talent, or you want to improve your accounting and finance hiring processes, contact the expert A&F recruiters at Contemporary Staffing Solutions today.