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Your Balance Sheet: Five Key Factors to Consider

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Company balance sheets are such an integral part of your business’s operations, but many owners don’t know how to read them. If you’re struggling to make sense of these sheets, we’re going to cover why they are important and what to look for when reading your sheet., Cash Flow Frog.

What Makes the Balance Sheet Significant? 

Why are balance sheets important? They provide your business with insights into your Assets and Liabilities at a given point of timeFor example, you can have a balance sheet for the end of last year or the last quarter. 

Often, quarterly balance sheets are used to compare: 

· Assets 

· Liabilities

· Owner’s equity 

However, there are many components on these sheets that you’ll need to learn to read. A Balance Sheet’s Components 

When you have balance sheets explained, it can be very complicated to understand. The data provided can be invaluable to running your business, but what does it all mean and what should you be looking at? 

The following are the three main components presented in your sheet: 

1. Assets: Current and noncurrent assets should be listed. Your assets will also include net receivables, inventory and cash, which will provide you with options to prevent business solvency. 

2. Liabilities: Your current liabilities are debts that must be paid within a year. The lower your liabilities, the better investors will view your business. If liabilities are much higher than cash flow, this is a strong signal that your business health is at risk and changes may need to be made. 

3. Equity: Owner’s equity is an important metric because it allows you to see how much money you have left, as the owner, after paying the company’s liabilities. If you’re the sole owner, this will show your investment in the company, but for a corporation, the figure indicates the value of the company’s stock before adjustments are made. 

However, your balance sheet will also provide insight into: 

4. Debt Ratio: Comparing total debts to assets will provide you with your debt ratio. For example, let’s assume that you have $100,000 in assets and $25,000 in debts. You would do the following calculation: $25,000/$100,000 to determine your debt ratio is 25%. Maintaining a debt ratio that is too high puts a greater risk on your business. 

5. Cash and Cash Equivalents: Finally, cash and cash equivalents must be reviewed because this is the figure that can help you pay off debt or provide the flexibility to pay off short-term debts. 

Once you have a firm understanding of all of these metrics, it’s important to understand what a strong balance sheet really looks like. 

What Does a Strong Balance Sheet Look Like?

if you look at the retained profit column, it will show you the profits that haven’t been paid out as a dividend to shareholders. However, a strong balance sheet goes beyond just this figure. 

A strong balance sheet will include: 

· Strong current ratio, or your ability to pay both short-term and long-term debts. This ratio is derived by using the following formula: current assets / current liabilities

· Debt ratios are important to keep low because they provide a lot of flexibility and keep business risks low. Your debt ratio is found by using the following equation: total liabilities / total assets

· Debt to equity should remain low, and this is found by using the following formula: total liabilities / shareholder equity

Finally, a strong balance sheet must have more assets than liabilities. You can also analyze things, such as unprofitable assets, which may have to be eliminated. 

Crucial Considerations For Your Balance Sheet 

Your balance sheets will provide great insight into your operations and the health of your business. For example, you’ll want to consider: 

· Current assets, or those that can be liquidated within a year if you need to eliminate debt. 

· Debt ratios that are too high put your business at risk. You may need to refinance these debts, if possible. 

· Cash or equivalents and how they can be used for things, such as paying off debt or taking advantage of growth opportunities. 

You’ll also want to look at any obvious trends that the sheet indicates, such as rising debts and lower cash. If you notice this trend, you’ll need to review your business’s operations and take action to lower debt and raise revenue. 

Concluding Remarks 

Company balance sheets are complicated, and if you don’t understand the data that the sheets provide, you should work on reading them. If you have an accounting team or can consult with an accountant, they can also help you make sense of the figures.

However, it’s always best to spend the time necessary to read through balance sheets so that you know exactly what has transpired in your business during the specified

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Christopher Stern
Christopher Stern is a Washington-based reporter. Chris spent many years covering tech policy as a business reporter for renowned publications. He has extensive experience covering Congress, the Federal Communications Commission, and the Federal Trade Commissions. He is a graduate of Middlebury College. Email:[email protected]

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