For many businesses, the income statement is the be all and end all. But if your business is geared for financial performance, it’s important that your business’ balance sheet is also healthy. Here are four helpful hints to tame your business’ balance sheet using inventory control.
What is the balance sheet?
Your business’ balance sheet is a picture of the financial health of your business; it records all of your business’ assets and debts. As a result, it shows the ‘net worth’ of your business at any given time. The balance sheet and, in particular, your business equity, can give you a quick sense of the health of your business’ financial control and inventory control. When your balance sheet is read in conjunction with your business’ income statement, various financial ratios can give you a sense of the company’s liquidity as well as its ability to generate cashflow.
Reduce Staffing Costs
Especially in the early stages of setting up a business, staffing costs comprise a major part of a business’ operating expenditure. This means that, for many small businesses, reducing staffing costs and benefits can boost business equity. Although employment law and ethical standards limit your ability to trim staffing costs, it’s important not to take on more staff than you realistically need. You can largely increase staff numbers as your business grows, rather than in anticipation of a future boom.
Keep Manufacturing Costs in Check
If your business operates in the fiercely competitive manufacturing space, it’s important that you keep a tight leash on production costs. Raw material costs, spoilage and underutilised plant and machinery can all jeopardise a healthy balance sheet. For many small businesses, laying out a lot of capital for specialised manufacturing equipment can be a risky move – outsourcing specialised functions can save your business a large and potentially risky investment and, as a result, slim down your business’ liabilities.
Pay Close Attention to Inventory Control
If you hold a lot of stock, your business’ inventory control will have a large bearing on your balance sheet. Carrying too much inventory on your business’ balance sheet can create some very significant risks; the risk of inventory becoming obsolete, damaged or lost increases as more inventory is added to the balance sheet. Moreover, holding more inventory than you need means that capital is tied up in an as-yet unproductive asset rather than generating cashflow or improving your business’ financial stability.
Carefully Identify Underperforming Assets
If your business’ assets aren’t generating a solid return (and if there’s no other rationale for holding on to them), you should consider whether to liquidate them. A close look at your financial ratios can help you work out whether your business is efficiently using its assets. If it’s not, a closer look will be required to work out what’s not going so well. The software that you use for inventory control should be able to help with this. Sometimes businesses use a lot of capital to hold assets that they use infrequently – remember that leasing machinery that you use infrequently or outsourcing production can often be the most cost effective option.
If you’re looking to scale up in 2018, or if growth has felt sluggish in recent times, taking the time to look at your balance sheet might be a smart investment. And if you’re still struggling to pinpoint the problem, consider getting some expert advice from an accountant or business adviser.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.