The Vital Role of Your Balance Sheet in Business Success
Business owners often prioritise profit and cost reduction, but it’s essential not to overlook the significance of your Balance Sheet. Even profitable businesses can face financial challenges, making your Balance Sheet a crucial indicator of your business’s solvency. Here, we explore four critical areas to focus on within your Balance Sheet for lasting success.
Profitability
Discover seven strategies for business growth and increased profitability:
- Enhance customer retention
- Boost lead generation
- Improve prospect conversion
- Increase transaction value and frequency
- Decrease variable costs
- Cut overhead expenses
- Concentrate on one or two of these strategies to enhance your business’s profitability.
Cashflow
Strengthening your cash flow is like building a cash reserve, which can help your business endure future downturns. Remember, cash is king, and a robust cash position equates to a stronger business. Prioritise strategies to reduce your Cash Conversion Cycle, the time your cash remains tied up in stock and accounts receivable. Negotiating better payment terms with suppliers, reducing inventory or work in progress, and minimising debtor days can enhance your Balance Sheet by increasing available cash.
Solvency
Solvency is fundamental to your business’s success and has two aspects:
- Your ability to meet debt obligations as they become due.
- The balance between assets and liabilities.
Assess your current ratio by dividing current assets by current liabilities. A ratio less than 1 indicates an inability to meet debt obligations, suggesting insolvency. The second aspect is determined by subtracting total liabilities from total assets. A negative result signifies insolvency, necessitating immediate action.
Shareholder Advance Accounts
If your Shareholder Advance Account appears as a current asset on your Balance Sheet, it signals that shareholders have withdrawn more than entitled. This poses a risk, as in the event of business failure, liquidators can demand repayment, endangering personal assets. Prevent an overdrawn Shareholder Advance Account by revisiting your personal budget to reduce withdrawals from the business, and adhering to a consistent schedule.
Ensure that any advances made to the business are secured, enhancing the likelihood of recovering your investment during liquidation.
If you’ve been neglecting your Balance Sheet, it’s time to reassess your profitability, cash flow, solvency, and Shareholder Advance Accounts. For assistance in calculating ratios or understanding the insights your Balance Sheet provides, don’t hesitate to reach out.
On 22 November from 12-1pm, Sharp Accounting will be running our Cashflow Management Seminar. This will be held at our offices here in Ballarat. Click here to find out more and register at no cost.‘
