The Essential Balance Sheet

By necessity, business owners are required to balance many demands. From financial management and operations to sales and employee issues, most family owned businesses require owners to focus on a myriad of issues.

For most business owners, the distractions of management cause financial assessment and exit planning to fall by the wayside. Even when the business is the owner's largest asset, no cogent plan usually exists to capture the value the owner has built over many years.

I am asking business owners to balance one more demand -- attention to their balance sheet. Understanding a balance sheet and its health is one part of assessing financial performance. This assessment will help to optimize your company's value and readiness for sale.

The balance sheet is too often overlooked in privately held companies. The owner might glance at it annually, but often it gets placed in the file never to be seen again.

A company's balance sheet indicates the structural stability of a company at a point in time. When properly interpreted, along with an income statement and cash flow statement, the balance sheet can give clues to more efficiently manage your company's resources.

For example, working capital has been likened to "gas in the tank". Working capital (cash, receivables, inventory, payables) should be managed to obtain the highest "miles per gallon", to use an automobile metaphor.

I challenge you, as a business owner, to an exercise this evening. Print this email, pull your balance sheet from the file, brew a cup of coffee and sit down in a relaxed place. Let's review balance sheet ratios that most us of learned in accounting class, or did we fall asleep during our professor's lecture on ratios? I will briefly mention a few of the most common ratios that you can calculate yourself in a few minutes time.

Current Ratio: Measures your solvency.

Quick Ratio: Measures Liquidity and ability to pay on obligations.

Debt to Equity Ratio: Measures the ratio between invested capital (equity) and debt capital.

Inventory turnover: Measures how often your inventory sells out each year.Most distribution businesses that have been operating for several years tend to carry too much inventory. Some companies need to refine the inventory management system to allow better control. Consider disposing of any unsalable or outdated inventory.

A/R days: Measures your average time to get paid. In this economy, uncollectible accounts receivable has risen and customers are stretching payments. Manage this revenue cycle in order to more efficiently use cash.

Sales or Profit to Asset Ratio: These ratios measure how well assets are generating sales and profits. Consider freeing up cash by liquidating unproductive equipment or leasing for peak demand. Remove or buy off any assets that are primarily for your personal use. Identify the least productive assets and find ways to increase utilization.

Ratios become relevant when you compare a company's present position to previous periods or to industry benchmarks. Benchmark ratios can be obtained from Risk Management Associates' Annual Statement Studies at rmahq.org.

A company's accountant can assist with ratio analysis and benchmarking financial statements. A machinery and equipment appraiser can provide current market values for fixed assets. Your business intermediary can help you position your balance sheet to prepare for a sale.

Managing your assets and liabilities efficiently can keep the business solvent, healthy, and well-positioned to sell for maximum value.