Don’t neglect your Balance Sheet

Don’t neglect your Balance Sheet 

Business owners tend to focus on increasing profit and driving down costs. While this is important, you must not neglect your Balance Sheet. Profitable businesses can and do go broke; your Balance Sheet is a key indicator of how solvent your business is.

Here are four key areas of your Balance Sheet to focus on:

1. Profitability.
There are seven ways to grow your business and increase profit:

  • Increase customer retention
  • Generate more leads
  • Convert more prospects
  • Increase transaction value
  • Increase transaction frequency
  • Reduce variable costs
  • Reduce overheads

Focus on one or two to increase the profitability of your business.

2. Cashflow.
Improving your cashflow helps build a cash war chest to help your business weather any future downturns. Remember, cash is king and the more cash you have in your business, the stronger it will be.

Focus on strategies to reduce your Cash Conversion Cycle; that is, the time your cash is tied up in your stock and accounts receivable. Negotiating better payment terms with your suppliers to preserve cash for longer, reducing inventory or work in progress, and minimising debtor days will all help build a stronger Balance Sheet by increasing your cash on hand.

3. Solvency.
Maintaining solvency is essential to the success of your business. There are two components of solvency:

  • The ability to pay your debts as they fall due; and
  • Having greater assets than liabilities
    To determine whether you can pay your debts as they fall due, calculate your current ratio by dividing your current assets by your current liabilities. A ratio less than 1 means you don’t have enough assets to pay your debts as they fall due and the business is insolvent.

The second part of the test is calculated by taking away your total assets from your total liabilities. A negative result means your business is insolvent and requires a short-term cash injection.

If your business is currently insolvent, action must be taken immediately to remedy this.

4. Shareholder Advance Accounts.
If your Shareholder Advance Account is a current asset on your Balance Sheet, the shareholders have taken more out of the business than what they’re entitled to. This is incredibly risky as, in the event the business fails, liquidators can call up this loan and your personal assets will be at risk. To avoid an overdrawn Shareholder Advance Account, revisit your personal budget to reduce the amount of drawings you’re taking from the business and stick to a regular amount each week or month.

It’s important that you secure any advances made to the business so that, in a liquidation, you stand a higher chance of getting your money back.

Have you been neglecting your Balance Sheet? Take some time to review your profitability, cashflow, solvency and Shareholder Advance Accounts. If you need help calculating your ratios or understanding what your Balance Sheet is telling you, get in touch!

Key numbers to focus on in your business now

Key numbers to focus on in your business now 

As a business owner, it’s always been helpful to have an understanding of accounting – but in the post-lockdown world, it’s never been more important to have a good grasp on your finances.

With the business world irreparably changed by the impact of coronavirus, your business is facing a ‘new normal’. Priorities have changed, customer behaviours have mutated and revenue streams have had to evolve and pivot in order to create a viable post-lockdown business model.

To track, monitor and drive your financial performance in this new business world, it’s increasingly important to have a handle on your key financial reports and metrics.

Getting to grips with your financial reports

Whereas in the past, extra cash in the business may have been seen as a surplus that needed to be spent on something, COVID-19 has shown us that having these reserves is vitally important for the survival and long-term health of businesses.

To truly be in control of this cash, it’s vital that you can dip into your accounts, financial reports and dashboards and ‘see the genuine story’ behind your financial position.

So, what are the key reports to focus on? Let’s take a look:

  • Budget – your budget is the financial plan that’s tied in with your strategic plan. In essence, the budget is your approximation of the money it will take to attain your key strategic goals, and the revenue (income) and profits you hope to make during this period. It’s a benchmark you can use to measure your actuals (historic numbers) against, allowing you to see the variances, gaps and missed targets over a given period.
  • Cashflow Statement – a cashflow statement shows the flow of money into and out of your business. Understanding these cash inflows and outflows in detail allows you to manage this ongoing process, allowing you to aim for a ‘positive cashflow position’ – where inflows outweigh outflows. In this ideal positive scenario, you have enough liquid cash in the business to cover your costs, fund your operations and generate a profit.
  • Cashflow Forecast – forecasting allows you to take your historic cash numbers and project them forward in time. As such, you can see where the cashflow holes may appear weeks, or even months, in advance – and that gives you time to take action, whether it’s increasing your income stream, reducing your underlying costs, chasing up unpaid invoices (aged debt) or going to lenders for additional funding.
  • Balance Sheet – the balance sheet shows you the company’s assets, liabilities and equity at a given point in time. In a nutshell, it’s a snapshot of what the business owns (your assets), what you owe to other people (your liabilities) and what money and profits you currently have invested in the company (your equity). The balance sheet is useful for seeing what stock and equipment the business owns, how much debt (liabilities) you’ve worked up and what the company is actually worth – all incredibly useful information to have at your fingertips when making big business decisions.
  • Profit & Loss – your profit and loss report (P&L) Your P&L gives you an overview of the company’s revenues, costs and expenses over a given historic period of time. Whereas the balance sheet is a snapshot, your P&L is more like a moving video. It shows you how your finances are progressing by demonstrating how revenue is coming in and costs/expenses are going out (rather than cash coming in and going out, as you see in your cashflow statement and cashflow forecasts).

Talk to us about accounting and financial reporting for your business

We’ll run you through the key reports in your accounting software, and can help you track performance, take action and prepare your company for surviving the new business normal.