This has all changed in the time we have been helping our clients with financial management at Base52. Sure, profits are important and a business that is not making profits will not last long but the balance sheet shows how tangible those profits are and what is left after distributions to the shareholders.
So our management accounts for clients show the profit & loss and the balance sheet too. We take time to review and prove every asset and liability total on the balance sheet. Are the fixed assets all still held by the company and are the values realistic? Are stock and work in progress valuations accurate? Are there any bad debts? Is the company collecting receipts from customers fast enough? Are liabilities affordable when coming due for payment and does the company have enough cash? Are dividends set at an appropriate level and affordable? These are all key questions which can only be answered by a thorough review of the balance sheet.
The best businesses have strong balance sheets. In other words, there are no hidden nasties, like bad debts or inflated stock valuations waiting to pop out and there is a healthy surplus of net assets. Perhaps 10% of sales is a desirable minimum level for net assets but 25% or more would be preferable and provide a contingency in the event of a downturn in business. Too many small businesses have negligible net assets and this exposes them to significant risks if trading is worse than anticipated. A weak balance sheet will also affect a company's ability to gain credit or loan finance.
If your business is profitable that is great news. If after tax and dividends there is still a good surplus on the balance sheet that is even better and essential if your business is to thrive. So take the time to understand your balance sheet. If it is not part of your regular monthly routine, I would argue it should be if you are serious about building a solid business.
