Using Your Balance Sheet to Better Understand Your Business: Part 2
In the first part of this series, we explored the basics of understanding your balance sheet and looked at Current Ratio. Now, let’s dig deeper. Beyond your current ratio, tracking trends in your monthly debt – accounts payable, credit card, and loan balances – can offer a more comprehensive view of your organization’s financial health.
Understanding Your Liabilities
Many small business owners focus on income and expenses, believing a positive cash balance in your bank account indicates a healthy business. However, this approach can mask underlying debt issues. Regularly adding up your accounts payable, credit card balances, and loan balances helps you monitor all liabilities, both short and long term.
Practical Steps for Tracking Liabilities
Monthly Review: Add up your accounts payable, credit card, and loan balances monthly.
Don’t forget to include mortgages, payroll liabilities, and sales tax payable. Set up a spreadsheet with a list of your liabilities and a running total by month so that you can easily input balances and generate a chart for a visual review. You can also add up your liabilities on a separate tracking sheet by exporting your Balance Sheet into a spreadsheet from your accounting software.
Hot Tip: If you input your bills into your accounting software before paying them, this information will be available on your balance sheet.
Trend Analysis: After you’ve been tracking this information for one or two quarters, look for trends. An increasing total liability indicates potential financial issues, such as unpaid bills or growing credit card debt, even if your cash is positive.
Example: Consider a company that saw its debt grow from $675k to $950k over a six month period. During this time they kept an eye on their bank balance and cash remained at a good level. However, as they tracked their liabilities they saw a steady increase in their overall liability balance. Upon investigation, they found it was due to unpaid accounts payable and growing credit card debt. If they had only been looking at cash and not tracking their liabilities, they might not have realized how deep into debt they had become.
Understanding the health of your business requires looking beyond your bank account and sales goals. By tracking all liabilities, and the trends in your monthly debt, you can identify and address potential debt issues early.
One Last Tip: Create an achievable goal – set a recurring reminder on your calendar to regularly review and understand your total liabilities to maintain a truly healthy business.
