By Ken Bauer, VP of Business Banking at Elevations Credit Union
How well do you understand your company’s balance sheet? What about your cash conversion cycle? Could you quantify, in real dollars, how much it costs to maintain a certain level of receivables on your balance sheet or that inventory on the shelf? Could you articulate the true cost, or savings, of a loan or line of credit, or do you just focus on the interest paid?
Most business owners feel about as comfortable being asked these questions as they do being asked by their dentist how often they floss. These just aren’t things a typical business owner has the background, let alone the time, to consider. However, learning how your balance sheet works, and more specifically how it works with your income statement, can be the difference between a well-managed company and a company that is truly running on all cylinders.
The goal of this article is to help take some of the mystery out of the balance sheet and make it less intimidating and more useful to business owners who have never quite tapped into its potential.
Keep in mind that every company is unique, and if you really want to dive deep into your own balance sheet, the best thing to do is reach out to either your CPA or your banker for guidance. Our team of Business Bankers at Elevations are highly trained in financial analysis and would be happy to advise you or help explain some of these concepts in more detail.
What exactly is a balance sheet, really?
Most people would define a balance sheet as a snapshot in time of their company’s health. While that definition is certainly correct, it is far from complete. Yes, looking at the balance sheet can quickly tell a business owner how he or she is doing in terms of cash, assets, liabilities and net worth, and those are all very important things. However, when we dig a little deeper, we will quickly learn that there is so much more to a balance sheet than simply a rundown of assets and liabilities.
The first thing to realize is that a balance sheet is most useful in conjunction with your income statement and vice versa. You simply cannot focus on one and not the other if your intent is to truly understand your business.
Next, the proper way to look at a balance sheet is as a comparison over time, and its power lies in its ability to show a business owner how the different aspects of the business are working, and more importantly, how they are working together. The balance sheet is ultimately the indicator that tells you if the choices you’re making day-to-day are good or bad for the business.
Lastly, everything on your balance sheet is ultimately tied to cash. To get yourself into a balance sheet state of mind, start thinking about everything your company owns and owes as being either a source of cash or a use of cash.
Elevations Credit Union is a member-owned not-for-profit financial institution serving Colorado’s Front Range. With a consultative approach to solving your business banking needs, Elevations local business bankers can help you improve your cash flow, reduce your borrowing needs or decide whether a term loan or line-of-credit is best, including quick-turn credit decisions. Click here to learn more about Elevations business banking or schedule an appointment.