2018 is over and done with. Most of you are reviewing you financials for last year – which usually means you are looking at your income statement.
This post is a plea to also review your balance sheet. All of you want to know what your sales are profits were for the year. But are you reviewing any of the balance sheet items?
- Cash. Your income statement says you made a nice profit last year. But you are scratching your head saying if you made all that money, where is all that cash? The answer is in your balance sheet. Paydown of loans, capital expenditures that were not funded with loans, increased accounts receivable. All of these are items that drain your cash.
- Accounts Receivable. What percent of your A/R is 60 days or older? How does that compare to last year? What is your DSO (days sales outstanding) – in other words how long does it take to collect your accounts receivable? How does this compare to last year?
- Working Capital. This is current assets less current liabilities. It is a measure of the liquidity of your company. Why is this important? It tells you what troubles you will run in to if your largest customer leaves or if your largest customer defaults on their accounts receivable. Working capital and the accompanying working capital ratio tells you how hard or easy it will be to survive a short term financial challenge.
- Debt to Equity. Divide your stockholder’s equity balance by the total of your liabilities. Like the working capital ratio, it gives you insights into your financial strength. The time horizon of this ratio is a little longer than the working capital ratio.
- Stockholder’s Equity. How close to zero is this number? The bigger the number, the more your banker likes your business and is more willing to make a loan. The smaller it is the more trouble you will have with the bank’s underwriting. In layman’s terms, how responsible are you as the business owner? If you take more money out of the business than what you make in profits, you may be viewed as irresponsible.
Theses are examples of things to look at on your balance sheet. Granted, it is the boring side of the financials (as opposed to the exciting income statement!) but it is worth your review. The person putting your financials together every month needs to include an analysis of your balance sheet.
Unlike the income statement that is always looking back, the balance sheet is forward looking. It will tell you when you have opportunity and when you are threatened.
If any of this is foreign to you, please reach out to me and we can talk more about it. Come up with a plan on how you should be reviewing your balance sheet.