4 Ways to Boost Your Balance Sheet

How to boost your balance sheet

Thinking about balance sheets isn’t the most exciting part of being a small business owner. However, if you want to position your business for growth or increase your cash flow, building a fortress balance sheet should be a serious goal. 

“A lot of small businesses just look at cash in and cash out,” Ben Richmond, managing director, North America at Xero, told us. “The balance sheet is important because it gives you the full preview of your business.”

Every business is different, so there is no one-size-fits-all solution for strengthening your finances. Consider using some or all of these strategies to improve your cash flow statement and balance sheet. 

1. Boost your debt-to-equity ratio.

It’s common sense that a business is generally better off with less debt and more cash on the balance sheet. “If you get to a really low debt-to-equity ratio, you can use it to raise capital,” Richmond said.

To improve that part of your business’s assets, you need to bring in more sales that you can use to pay down debt. You also may have to unload assets, such as office equipment or real estate property. Boosting your debt-to-equity ratio will strengthen your balance sheet, improve your cash flow and put you in a position to pursue growth.

2. Reduce the money going out.

A cash-flow deficit will quickly spell a small business’s demise, which is why reducing the money going out is an effective way to improve your balance sheet and bottom line. To optimize cash flow, Richmond advised mapping out different scenarios for the cash going out of the business, including the worst-case, best-case and likely scenarios. If your likely scenario looks a lot like the worst-case scenario, find ways to drastically cut business costs, Richmond said.

3. Build up a cash reserve.

In addition to managing the cash going in and out, it’s crucial to monitor the amount of cash held in your business savings account, said Val Steed, director of accountants at Zoho. You can use that money for emergencies or unexpected opportunities. Without cash in reserve, you might need to scramble to secure financing quickly.

“My general rule of thumb is, until you build up your hold or protective balance, one-third goes back into operations, one-third is invested back into the business to improve growth and one-third is the hold,” Steed said.

4. Manage accounts receivable.

Getting paid is a big challenge for all small business owners. The longer bills go unpaid, the more pressure it puts on cash flow. Steed said to improve the balance sheet and cash flow, you should focus on managing receivables. That doesn’t mean just sending out a bill reminder email or asking your salesperson to try collecting the amount owed. Rather, it requires you to put someone in charge of collecting overdue bills using persistence, patience and politeness while charging late fees on unpaid invoices.

“Never put a salesperson back on a bad account,” Steed said. “The salesperson stays in the good-guy role at all times.”

What makes a strong balance sheet?

A balance sheet provides a snapshot of your business’s total assets, debts and shareholder equity at a moment in time. It plays a crucial role in your ability to secure funding through a loan or investor. These are the main attributes of a strong balance sheet:

• More assets than liabilities: A cornerstone of a strong balance sheet is having more assets than liabilities. To run a business successfully, you need more money coming in than going out.
• Positive net assets: Net assets are the value of your assets after you pay your obligations. If you have plenty of assets after everything is paid off, your balance sheet is in a strong position. Businesses with positive net assets tend to do better in economic downturns than businesses with low net-asset positions do. Net assets are calculated using the following formula: (total fixed assets + total current assets) – (total current liabilities + total long-term liabilities) = net assets.
• Strong assets: Assets alone won’t make your balance sheet healthy. Your assets must be active and valuable to count as positive contributions. Even if your inventory is valuable on paper, it’s not worth that much if you aren’t moving it. A strong balance sheet often has assets that provide value now rather than potential value later.
• Healthy receivables: You can have all the sales in the world, but if you don’t set up an accounts receivable process, your business may still struggle to get paid. Debtors who are slow to pay their bills can do real harm to a business. Healthy receivables reflect positively on your balance sheet.

3 ways to analyze a balance sheet

When you evaluate your balance sheet, you are assessing the financial health of your business by looking at factors such as its assets, liabilities and equity. By examining such key financial data, you can gain insight into your company. Here are a few accounting ratios you’ll need to use:

1. Current ratio

Your business’s current ratio, calculated by dividing current assets by current liabilities, shows how much cash you have to run operations. Strive for a current ratio of 1.5 or higher.

2. Debt-to-equity ratio 

This ratio measures the amount of shareholder equity available to cover the business’s debts. The lower the ratio, the better a company is positioned to weather an economic downturn. Your debt-to-equity ratio is calculated by dividing total liabilities by total shareholder equity. The statement of shareholder equity, also known as owners’ equity, is the amount of money the business owner would receive if the business assets were liquidated and all of the debts were paid off. Keep this ratio as low as possible for a strong balance sheet.

3. Working capital ratio 

Your working capital ratio is calculated by dividing your current assets by your current liabilities. Most small businesses want a positive working capital ratio. Negative working capital means you don’t have enough cash to bankroll operations and could signal that you need to reduce operational costs or unload assets.

Simplify your business’s accounting 

You should strongly consider using top small business accounting software to fine-tune your business’s finances. Accounting programs can generate balance sheets and cash flow statements automatically so you don’t have to create them by hand. Software also reduces human error and eliminates inefficient manual data entry. 

The best accounting software is easy to use and can integrate with your bank and other business apps. If you implement small business accounting software, you can simplify your finances significantly and put yourself on the path to building a solid balance sheet. 

Kimberlee Leonard and Mike Berner contributed to this article. Source interviews were conducted for a previous version of the article.