Businesses with strong balance sheets are more likely to survive economic downturns and be ready to thrive when the going gets good again. The basic assumption is that a strong balance sheet entails simply having more assets than liabilities.
However, business owners should be aware that a strong balance sheet goes beyond this; the best balance sheets are structured to support the entity’s business goals and maximise financial performance overall. In this article, we provide a few key tips as to how you might improve your balance sheet.
Save Money and Avoid Debt
While you may think you have your savings under control, it is a difficult thing to manage without a budget in mind. Rather than simply stashing funds away for things like vacations or retirement, make sure you have a well thought out plan in place and a corresponding budget for all your expenses. Keep track of your spending, establish specific goals and stick with them. Doing so will help you to save money, and this will drastically improve your balance sheet overall.
Relatedly, large amounts of debt can wreak havoc with your balance sheet. As a business owner, you need to avoid all unnecessary debts and ensure that you are spending within your defined budget limits. To improve your balance sheet, cut some major expenses and use the resulting surplus to eliminate debt.
Intelligent Working Capital
The ideal balance sheet will utilise the optimal level of working capital (current assets less current liabilities) to fund the company’s core operations, with the end goal of driving revenue and profit. It is paramount that business owners are aware of what the optimal level is.
To do this, you need to strike a balance between liquidity and profitability. One way to do this is to assess the extent to which you have funds tied up in stock. Having too much stock can strangle your cash flow and greatly reduce your ability to meet financial obligations, and this can wreak havoc for your balance sheet.
In a similar way, having too much cash sitting in the bank could be inhibiting your ability to grab opportunities for growth. These dormant funds may in fact be better utilised by investing them in higher income-generating assets, by paying off debt or by distributing to shareholders and beneficiaries.
Good Cash Flow
Healthy cash flow is key to improving your balance sheet. One easy way to keep an eye on cash flow is through forecasting, budgeting and the use of variance analysis, ideally through inventory management software.
By tracking your sales and expenditure with inventory management software, you will be able to make proactive predictions about your budget and inventory needs.
While investing your money can be a daunting task for a novice, if done right it can be an excellent way to improve your balance sheet. Start by figuring out the basics – get an understanding of common financial jargon, and do your research before you pick what you want to invest in.
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.