How closely are you monitoring your finances?
When we do an observation for a company within the home improvement industry, one of the first things we take a look at are their financial statements. There is no better way to get a “snapshot” of a company’s financial resources and obligations than by examining a balance sheet.
Here are some important guidelines to consider when analyzing your balance sheet:
- Measure the current balance sheet against the previous month’s and the same month from the previous year
- Use the entire balance sheet, not the company’s cash balance to determine the wisdom of a large purchase or acquisition of debt
- Construct and review depreciation schedules and aged receivables on a regular basis
- Balance sheet accounts are ongoing and are not reset at the beginning of each year
- When performing this analysis, you will be determining your company’s leverage (the ratio of debt to equity – assets are funded with either debt or equity).
- Compare tangible assets (cash, accounts and notes receivable, inventory, equipment, “lease hold” improvements and the like) to intangible assets (non-physical resources such as customer lists, goodwill, trademarks, franchises and similar). Keep in mind that tangible assets are are usually more liquid than intangible ones.
- How solvent is your business? Solvency = The ability to meet future debt obligations. Compare the liquidity of assets with the maturation of company liabilities.
- Liquidity is the ability to convert assets into cash. Accounts receivable that are collectible within 30 days are more liquid than a note or investment which might take several months or longer to sell.
- Evaluate earning before interest, taxes, depreciation, and amortization (E.B.I.T.D.A.) to ascertain the true value of your company
- Assess the book value for estate planning (and similar) purposes
- Plan for year end (or similar) tax liabilities, bonuses, owners (stock holders) compensation
- Structure an exit strategy to plan for the future of your business
Unless you are an accountant by trade, or someone who enjoys working with numbers, you probably find this to be a laborious process. However, if you are a business owner it is vital to account for all of the money that is tied up in your business.
For more information on how to analyze your financial statements, you can contact us directly at email@example.com.