Bolstering Your Balance Sheet
An important seminar topic for 2020 was on helping business owners get to grips with understanding how to read their Balance Sheet – the story of your business – as well some practical and proven strategies for building a stronger Balance Sheet.
Looking Beyond the P&L
So often we see business owners and consultants focusing all their energy on the Profit and Loss Statement – looking at ways to drive up revenue and drive down costs.
While this is important, unless there’s a focus on the Balance Sheet, profitable businesses can and do go broke. For example, if you drive up sales but don’t have a great system for invoicing your clients or collecting the money owed, the business can run out of cash. Likewise, a growing business may over-invest in stock and then, in a downturn, find it difficult to move this stock and convert it into cash.
Cash is often described as the oxygen for the business and the Balance Sheet is where your cash is measured – there are some useful calculations that can be done to show how much cash can be created by influencing other numbers on the Balance Sheet such as debtors, stock and work in progress.
Having a war chest of cash is essential in times of economic downturn. If profits are down, or if you’re making a loss, a strong Balance Sheet can see you through until profitability is restored.
Reading Your Balance Sheet
Your Balance Sheet, also known as a Statement of Financial Position, provides a snapshot of your business’s financial position at a specific point in time.
It measures the net worth of your business, which is your assets less your liabilities. It also shows if your business is solvent; if your liabilities are greater than your assets then the business is insolvent and urgent action is needed to fix this.
You can also compare different periods to determine whether the business’s net worth is increasing or decreasing between years and can track the strength of the business. The stronger your Balance Sheet, the easier it will be for your business to survive a downturn.
It also provides a basis to calculate key ratios, such as debtor days, inventory days and working capital.
Four Pillars of Strength
There are four areas of focus for building Balance Sheet strength:
- Increase profitability – which is incredibly important in the current climate.
- Improve cashflow – there are a number of ways to do this which I’ll explain shortly.
- Measure solvency – that is, whether your business can pay its debts as they fall due and whether assets are greater than liabilities. Having real time, up to date information is very important to determine solvency.
- Shareholder Advance Accounts – this measures whether you’re taking more funds from the business than are owed to you as shareholders. Having a dividend and drawings policy is essential to ensure you don’t end up with an overdrawn advance account, as liquidators can chase you personally for the balance owed.
Please join us in our quarterly Planning for Success 2021 seminar series or future Bolstering Your Balance Sheets workshops to be part of the conversations around how you can work on each of these for areas, in more detail. Or contact us to book a one-on-one coaching session.
You are also welcome to watch and share the webinar recording here.
How Can We Help?
Contact us if you would like to book in a session covering these topics:
- Cashflow Forecast
- Financial Awareness / Cashflow Management Coaching
- Balance Sheet Health Check
- Complimentary meeting