5 Tips for Analyzing a Balance Sheet

5 TIPS FOR ANALYZING A BALANCE SHEET

PRACTICAL ADVICE TO HELP YOUR BUSINESS OPERATE MORE EFFICIENTLY

Your balance sheet lists your assets as compared to liabilities and remaining net worth or equity. Analyzing the balance sheet is a key responsibility for business owners and decision-makers. Knowing what heavy equipment, cash in reserve and other assets you have available in addition to the amount owed to creditors and the equity or book value that exists, can help guide you to making more informed and better decisions for your business. Keep these five tips in mind the next time you review your balance sheet.

1. Make sure your balance sheet adds up
 

It's a simple yet extremely important piece of advice. Large companies have the luxury of hiring dedicated employees and several layers of review for their balance sheets, but you may have a trusted staff member, or an outside accountant create your balance sheet.

One advantage you have as a business owner in a smaller enterprise is an intimate knowledge of nearly all of your company's activities. Put what you know to use by engaging in a comprehensive review. Sure, calculating and recalculating the numbers to confirm accuracy is critical, but be sure to dedicate time to ensure no items are missing from your balance sheet.

2. Look for major outstanding receivables
 

Unfortunately, business debts aren't as simple as consumer purchasing. You can sign a contract, complete the required work, and still wait to receive payment. Some delays are inevitable, but they should never drag on for an extended period of time without communication between you and the individual or business that owes you money. While you might not be able to collect immediately, confirm that a payment plan can be developed and execute. Whether an error led to a lack of payment or your debtor is simply dragging their feet, a balance sheet review helps you prioritize recovering outstanding receivables.

3. Monitor working capital closely
 

Working capital is a key predictor of short-term business resiliency and future financial stress, as The Balance pointed out. Because this figure represents what would be left over if a business used short-term resources to address short-term liabilities, it helps you identify what portion of available assets could be designated for growth. This is vital for companies that are considering acquiring more heavy equipment and similarly big investments - although there are other alternatives to outright purchasing that can also help you manage your balance sheet.

Working capital can also help you understand your options in the face of an unpredictable business downturn or other emergency that could negatively impact operations. If you don't have much in the way of working capital, you should make it a priority to increase assets and reduce liabilities to create more stable financial footing. If you need to boost working capital for a specific need, you can also consider a working capital loan from Cat Financial.

4. Consider alternatives to purchasing major assets
 

Purchasing heavy equipment outright can significantly impact both your balance sheet and your business as a whole. You get to add the equipment as an asset, but you lose an equivalent amount in working capital. This reduction in flexibility can be difficult for organizations to manage, especially if a hardship crops up shortly after purchase. Cat Financial offers leasing and financing options that can help you lessen the financial burden that accompanies a direct acquisition. Each option brings its own advantages in terms of how it appears on your balance sheet as well, so be sure to carefully consider both loans and leases to decide which is best for your company's unique financial situation.

5. Take care to understand what your balance sheet tells you
 

Your balance sheet offers a lot of important information, as long as you know how to interpret it. It's easy to read an article that tells you to take the time to review your balance sheet, but the obligations that come with owning and operating a business can get in the way. Your balance sheet is important enough that it should be regularly reviewed, whether that means blocking off your calendar or setting aside time once you come home from the office. Your balance sheet should be considered an asset in and of itself.

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