A strong balance sheet is imperative for a business’ success. Having a strong balance sheet not only protects your business in economic turmoil, but enables growth when the market’s confidence is back up again. Businesses with strong balance sheets go beyond having more assets than liabilities, they encompass a method that supports their business’s goals and maximising financial performance.
There may be many factors contributing to why a business may not have a strong balance sheet. For example, lack of financial performance, getting into large amounts of debt that may be unserviceable to the business, squeezing too much money out of the business, and so on. If your business is experiencing a less than ideal balance sheet, it is worth engaging with a business advisor to enable your business to get to the core of the problem. Great advisors will generally oversee three things: first, identify the causes of the weak balance sheet; second, suggest processes and actions for improvements; and third, enforce accountability.
Meanwhile we suggest the following best tips for achieving for a strong balance sheet:
Improve inventory stock management
It is especially important if your business trades in goods, to try and review your inventory stock levels immediately. If inventory stock is obsolete, then your business needs to get rid of this – the cost of holding onto it could be more counterproductive than you realise, for example the cost of warehouse space alone.
Does your business have a procurement strategy? For example, having a purchasing schedule for the year can be beneficial if adhered to. With the right planning and procurement, you’ll have a positive effect on your business’ balance sheet.
Reduce debtor days
Debtor days measures how quickly cash is being collected from debtors. Look at the collection of your receivables, as slow paying debtors can be highly detrimental to your business’ balance sheet. We suggest implementing a clear collection strategy to ensure your business is getting paid on time. This includes, being clear on payment terms, perhaps offering incentives for early payments, and charging late penalties on overdue invoices.
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Review underperforming assets
Some assets will not be generating a healthy return. If an asset has been underperforming chances are that it will never return the cash your business is looking for – if this is the case it is time to liquidate them. We suggest conducting a financial ratio analysis to determine whether your business is using its assets effectively and efficiently. Your business may find that perhaps leasing assets rather than purchasing them could be more economically viable, this may be particularly true for assets that depreciate quickly such as technology.
Conduct a SWOT analysis
We suggest you maintain a forward focus and look to undertake a SWOT analysis. Look at your strengths, weaknesses (that happen internally) and opportunities and threats (that happen externally) and ask yourself what may be lurking around the corner? For example, what are the threats to your current position? What strategic plans should you make for future opportunities? Your balance sheet should reflect your business strategy to create synergy, therefore impacting it positively.
Taking these tips into consideration is important when aiming for a strong balance sheet. Strong balance sheets can help your business growth, even in economic downfalls and furthermore, it also decreases the risk of failure. Above all, a strong balance sheet will help your business be more agile and give your business options to shape a more profitable future.