Tip Of The Day #88 - Mentally Unbalanced Due to Your Balance Sheet?
Barbara Steckly
Mentally Unbalanced Due to Your Balance Sheet?
Understanding your balance sheet keeps your finger on the pulse of your business’s “health”.
A balance sheet can be very revealing when it comes to the state your business is in on any given day, so you’re not just going to “drop your drawers” and expose yourself for anyone.
Basically, your total Assets are equal to your total Liabilities plus Owners’ Equity, (that being the owner’s investment in the business minus the owner’s draws or withdrawals from the business plus the net income (or minus the net loss) since the business began.)
Two important aspects that your bank will look at if you are applying for money are, first, your Working Capital which is your Current Assets minus your Current Liabilities.
The larger the Working Capital number is, the better. If it equals zero, showing you have no working capital, your lender will not be pleased.
Lending institutions also look at your Current Ratio which is defined as your Current Assets divided by your Current Liabilities.
The higher your current ratio is, the better, as well. If it only equals one, once again it means you have no working capital and your lender will not like this either.
These two calculations are measuring your business’s liquidity. They basically indicate whether or not your business can meet its debt obligations when they become due. The more cash you have, the more likely you will be able to make it through the tough times, or the next recession.
Ironically, the less you look like you desperately need money, the more likely the financial institutions are to want to lend it to you.
Preferred Client Services, professional bookkeepers in Edmonton, AB working as business partners to make a positive difference to your bottom line!