Balance Sheet Management – Make It Simple

For some time I’ve been thinking about how confusing the idea of Balance Sheet Management is.  From my experience with a wide range of companies, it is clear that few small business owners truly understand the concept, and even fewer understand the purpose.  So, for the small business owner, CEO, or manager, consider these thoughts and see if they help.

First, let’s define what the Balance Sheet (also know as the Statement of Financial Position) represents.

Balance Sheet – A Simple Definition

In a nutshell, the Balance Sheet is a snapshot of a company at a particular point in time.  This snapshot shows the Assets, Liabilities, and Equity of the company as of that point in time.  There are of course more sophisticated definitions, but this simple definition serves our purpose.

Next, we need a working definition of Balance Sheet Management.  While important, for now let’s forget about such things as Generally Accepted Accounting Principles (GAAP), Proper Reporting Procedures, or Benefits of the process, etc.  Instead, just consider a  simplified definition, keeping in mind that the previous items are involved in actual practice.

Balance Sheet Management – A Simple Definition

Balance Sheet Management is the process of planning, coordinating, and directing business activities that directly determine the Assets, Liabilities, and Equity of a company.

Okay, I won’t quibble with those who want to say, “But it is so much more!”  Yes, of course it is, but the purpose of my definition is to boil it down to the simplest terms.  The other things mentioned above are more related to technique, process, procedure, etc.  So, why do I want this simple definition?  Well, because if we understand it in simple terms, we are ready for the next item – Purpose.  Let’s define that now.

Purpose of Balance Sheet Management

The Purpose of Balance Sheet Management is to position a company to have adequate resources for current operations and for financing future growth.

Again, I’m not questioning all the other benefits.  I’m interested in establishing a basic, fundamental purpose.  The reason is to establish the platform from which we will discuss management of particular parts of the balance sheet.  I will touch on these in future blogs.  Should like to know more, contact us at: AimCFO – Contact

As always, your comments are welcomed.

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