Balance Sheet | A Different Look

When you look at a family photo there is something interesting that happens. While at first you may look at the group as a whole, if you look long enough you will invariably begin to think about specific individuals in the picture. You may think about the unique traits they have they you really like or even those traits that can drive you nuts. Do you sometimes find yourself thinking how much someone adds to your family? Perhaps you are even reminded of the challenges someone presents. So, what does this have to do with a company’s balance sheet?

The Balance Sheet in Total

At first glance a balance sheet may look like just a bunch of numbers, but we know that’s not true. If you spend long enough examining it you will find yourself focusing on certain numbers. For example, the amount of accounts receivable or inventory may stand out on the asset side. Likewise, accounts payable and notes payable may stand out on the liability side.

Strengths

Just as when you consider individuals in a family photo, eventually you may find yourself wondering what each item on a balance sheet adds or takes away from the overall strength of you company’s financial position. Are your assets producing a good return for you? Can they be used to secure a needed line of credit? Is you cash position better because you were able to purchase equipment using a note payable?

Weakness

Again, just as a family member may present challenges, so can specific items on your balance sheet. Do you have so much tied up in inventory that your cash flow is negatively impacted, thus making it difficult to do the things you know you should? The same goes for accounts receivable and many other assets. Like assets, liabilities should be closely examined. If you are consistently late making vendor payments, what needs to happen to stop this to be sure you can continue to get products and services needed to operate? Are you using long-term debt to finance current expenses, and if so, how can you correct this? Has you line of credit become what is known as an evergreen loan? See How to Get the Bank off Your Back for more on this.

The Bottom Line

Remember that eventually every sale must be converted to cash and every liability will consume cash. Obviously we all want to receive more cash than we spend. By looking at these individual items on your balance sheet and developing ways to manage them more effectively, you increase the likelihood you will have excess cash. For some thoughts on the cash account, see Cash Management -It’s Not About the Cash Account.

What about your company. Is the balance sheet just brushed over quickly or are you being deliberate about closely examining the details?

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

Share

Leave a Reply

Enter your email address:

Delivered by FeedBurner