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Do a Balance Sheet Health Check for Fast Answers

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balance sheet

If someone asked you, “How’s Business?” — what would you say? You’d be surprised how many small business owners don’t know. Or they think they know, but are forgetting some costs or not recognizing early warning signs.

What’s on the Balance Sheet?

Basically, you’ll see three lists: assets, liabilities, and equity. The total assets will be the same, or balanced with, total liabilities plus equity — hence the name “balance sheet.”

  • Assets include cash/cash equivalents, accounts receivable, property, equipment, and some types of intangible assets. Assets are usually reported at their original cost or lower to allow for depreciation and other factors.
  • Liabilities are any money owed, such as business loans, taxes, accounts payable, and accrued expenses.
  • Equity is the money invested by the owners plus any company earnings that you chose not to withdraw as dividends or distributions.

Health Check #1: Assets to Liabilities Ratio

Current Liabilities ÷ Current Assets = Debt to Equity Ratio

This number shows you whether the company is able to pay its bills — it has more current assets (cash or convert to cash within one year) than current debts (payable within one year).

  • If the ratio is more than 1, congratulations, your business is healthy.
  • If it’s 1, you’re breaking even.
  • If it’s less than 1, you’re in trouble.

Health Check #2: Debt to Equity Ratio

Current Liabilities ÷ Total Equity = Debt to Equity Ratio

This reveals whether you’re too deeply in debt; in other words, you have too much financing from loans as compared to investments from owners or stockholders. A high ratio number might be a sign that there will be problems with debt repayment. It also tells prospective lenders or investors that the business is a higher risk.

  • For most small and medium-sized businesses the maximum acceptable debt to equity ratio is 1.5 to 2 (15% to 20%).

Health Check #3: Asset Turnover Ratio

Net Sales ÷ Average Total Assets = Asset Turnover Ratio

(Net Sales: see your income statement)

(Average Total Assets: from the last 2 years’ beginning and ending balance sheets)

This tells you how efficiently your business generates sales from its assets. The higher the ratio, the better. On the other hand, a low ratio may point to management or production issues.

  • What’s considered a “good” asset turnover ratio varies widely by industry. Therefore, it’s best to compare your ratio with similar companies in your field.

The balance sheet is just one of the essential documents Xendoo provides our clients, giving them the information they need to avoid the pitfalls and seize the opportunities for growth and success. Contact us to learn more about our affordable, real-time financial services for small businesses.

 

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

6 Ways Profit & Loss Statements Help Small Businesses Succeed

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a woman looking at papers while sitting at a desk

The most obvious benefit of your monthly P&L statement is that it shows whether you made more money than you spent — in other words, your net income (or loss). But that’s just the beginning.

Here are 6 more ways to use that accounting report to keep your business on track for success.

1. Check up on company expenses.

Like most accountants, we believe that operating and administrative expenses should not be more than 20% of gross revenues. To find your percentage, subtract expenses (not including cost of goods or sales) from revenues, then divide that amount by revenues.
Example:
Step 1. $100,000 gross revenues – $80,000 expenses = $20,000 difference
Step 2. $20,000 difference ÷ $100,000 gross revenues = 0.2 (20%)
If your percentage is too high, you’ll need to look closely at every line in your expenses column, from advertising to utilities, for cost-cutting opportunities.

2. Analyze the cost of goods or sales (COGS).

Many business experts say that COGS should not be more than 75% of your gross revenues. With both cost of goods and gross revenues shown on your P&L statement, this percentage is easy to calculate.
If it’s more than 75%, the next step is to do something about it. Look for ways to reduce COGS by cutting production costs, finding better prices on supplies, and so on. Conversely, consider increasing gross sales, perhaps by raising prices.

3. Prepare for tax season.

By regularly updating your P&L statements, you’ll also be keeping your books current. Everything will be ready to prepare your return, and you’ll spare yourself the giant headache of trying to catch up on months’ worth of backlog all at once.

4. See how much you can reinvest in the business.

Is it the right time to move to a larger facility, add more staff, expand your product offerings? The answers are right there in your bookkeeping reports, such as the profit and loss statement.

5. Prove you’re a success.

When the day comes that you need a business loan, a new investor, or a buyer for your business, your P&L statements will be a valuable negotiating tool. They provide concrete, chronological record of exactly how well the business has done since its beginning.

6. Compare yourself to your industry standard.

Two important ratios show how you stack up against your competitors.
Gross Profit Ratio reveals how much income your business generates on sales. A high ratio means you have a healthy profit margin, and won’t be wiped out by unexpected increases in expenses.
  • The formula: Gross revenues – COGS  ÷ gross revenues = GPR
Return on Equity measures how much investors have gotten back from what they put into your company, and is a good predictor of future returns for anyone thinking of investing in you.
  • The formula: Net income ÷ shareholder’s equity = ROE
As you can see, the profit & loss statement is essential to making informed, timely decisions. That’s why Xendoo guarantees delivery of P&L statements to our clients on the 5th business day of every month. It’s all part of our real-time bookkeeping service that moves at the speed of business and lets you get back to doing the work you love.

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.