Year end is just about here. You know what that means, right? It's a great time to
settle in by a roaring fire and catch up on reading ... your company's financial
statements. One chapter worth a careful perusal is the balance sheet. Therein may lie
some important lessons.
3 ratios to consider
In a nutshell, a balance sheet summarizes a company's assets, liabilities and
shareholders' equity at a specific point in time. Its objective: To provide an
accurate snapshot of the financial standing of the business.
Yet a balance sheet can do so much more. There are a number of ratios you can draw
from this report, which can help you lay out strategic plans for next year. Here are
three to consider:
- The ratio of current assets to current liabilities.
If this ratio falls below 1, the company may struggle to pay bills coming
due. Some business experts believe a current ratio of less than 2:1 is
problematic. But the ideal ratio varies from industry to industry.
- Growth in accounts receivable compared to growth in sales.
If receivables are growing faster than increases in sales, your company might
be building up bad debts or you could be selling to large customers under
disadvantageous terms. You may even be the victim of fraud. (Note: Sales are
expressed on your income statement, so you'll need to look at that statement,
- Growth in inventory vs. growth in sales.
When inventory levels increase at a faster rate than sales, a business is
producing products faster than they're being sold. Or, in the retail
industry, a company may be overbuying - an inefficient use of working
capital. There can be many mitigating circumstances, however, so it's
critical to determine exactly what's going on.
These are just a few things you can learn from your balance sheet. And we haven't even
gotten into the thrilling tales lying within your income statement and statement of
cash flow - the other two parts of your financial statements. Please contact our firm
for help making the most of this important information.