We see business owners and consultants focusing all their energy on Profit and Loss Statements – 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 become insolvent. For example, if you drive up sales but don’t have a system for invoicing your clients or collecting the money owed, the business can run out of cash.
A Balance Sheet is where your cash is measured – you can calculate how much of it can be created by influencing other numbers on the Balance Sheet, such as debtors, stock and work in progress.
This 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 debts. It also shows if your business is solvent – if your liabilities are greater than your assets, and urgent action is needed to fix this.
You can also compare different periods to determine whether the company’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.
Due to the pandemic, many company’s Balance Sheets would’ve likely taken a hit from a downturn in business.
What’s important is to focus on what you can control and adopt practical and proven strategies to bolster your Balance Sheet, such as the following:
- Focus on increasing profitability.
- Focus on improving cash flow.
- Focus on 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.
- Focus on your Director and Shareholder Accounts – these measure whether you’re taking more funds from the business than are owed to you as directors and shareholders. .
- Additionally, 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.
- Revising your budget is a crucial action if you haven’t done so already.
For more information or advice on related matters, please contact our experts today!