Balance Sheet Secrets – 3 Quick Things That Improve Cash Flow 10%-30%

Most business owners seldom look at their Balance Sheet.? This is a big mistake because the Balance Sheet can help you improve cash flow by 10%-30%.

I get it:

? - it feels complicated

? - It’s not the main thing you enjoy

? - There are other things to focus on

Understanding the balance sheet is crucial for entrepreneurs to make informed decisions and improve their businesses. Here are three important things entrepreneurs should know about their balance sheet.

Breaking Down the Top 3 Reasons:

1.?? Balance Sheet Accuracy

We all know that Assets=Liabilities+Equity.? The problem is that the data on the balance sheet may be missing critical information, which makes it difficult to rely on it for informed decision-making.

??PRO TIP: Hire a professional bookkeeper.? They will ensure your assets and liabilities are entered correctly (including loans).? The equity section of your balance sheet will tell if you are well capitalized, or in need of a cash injection.?

Hint: A negative equity number is the minimum amount of money you need to have sufficient cash flow (i.e., “less stress”) to run your business.??

Example: If you are a $1 million revenue company with $200K negative equity, you need at least $200K to right the ship.? Your options may include a capital injection from the owner, investors, or a bank loan.

??Commit to timely and accurate data for informed decision-making.? This tactic alone can result in a 10%-30% improvement in your cash flow once you know exactly where your money is!

?2.?? Working Capital Management: Stop Focusing only on $$’s, and start measuring %’s and Key Ratios

A). Current Ratio: Entrepreneurs can pay attention to the current ratio, which is calculated by dividing current assets by current liabilities. This ratio provides insight into the company's short-term liquidity and its ability to cover immediate obligations (like vendors, payroll, and a decent paycheck for the owner)! A ratio above 1.0 indicates that the company has more current assets than liabilities. I like to call this your Business BMI.

???A ratio of 1.25:1 or better, should be your goal (higher is better)!

??? Cash Flow Impact: Monitoring working capital components, such as accounts receivable, inventory, and accounts payable, is crucial. Efficient management of these elements can positively impact cash flow. For instance, reducing the collection period for accounts receivable or optimizing inventory levels can enhance available cash for other business needs.

?? PRO TIP: Shaving off just 5 days from A/R collection can result in a considerable increase in cash flow (ask me how)!

??? Hint: Your minimum working capital should be equal to 10% of your annual revenue.?Working capital is Cash, plus A/R, plus access to your lines of credit.?For a $5 million company, that means $500K working capital. I purposely removed inventory from this equation (ask me why).

3.?? Owner’s Equity and Financial Leverage

Owner’s Equity: Entrepreneurs should understand the composition of owner's equity, which represents the residual interest in the assets of the business after deducting liabilities. Changes in owner's equity over time reflect the profitability and financial performance of the business.

Financial Leverage: Examining the balance between debt and equity is essential. While debt can be used to finance growth, excessive leverage can increase financial risk. Entrepreneurs should be mindful of the debt-to-equity ratio, as high levels of debt may lead to increased interest payments and financial instability.

??PRO TIP: Measure your Debt-To-Equity Ratio.? Every industry varies, but a general rule of thumb is for every $3 dollars of debt, you should have at least $1 dollar of equity (3:1). ?A lower number is better here.

Example: If you have $100K of equity in your business, your debt should not exceed $300K. Exception: Commercial Mortgages can be excluded or carried “Off Balance Sheet” in a separate entity. ?

Knowing Your Numbers Improves Your Financial Health

By gaining a comprehensive understanding of these aspects of the balance sheet, entrepreneurs can make informed financial decisions, identify areas for improvement, and strengthen the overall financial position of their businesses. Regularly reviewing and analyzing the balance sheet is essential for effective financial management. ??

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