Businesses with strong balance sheets are more likely to survive economic downturns and be ready to thrive when the economy starts to rise again.
A strong balance sheet goes beyond simply having more assets than liabilities. Entities with strong balance sheets are those which are structured to support the entity’s business goals and maximize financial performance.
Intelligent Working Capital
A strong balance sheet will utilize an optimal level of working capital (current assets less current liabilities) to fund the business’ core operations, with the end goal of driving revenue and subsequently profit. Having too many funds tied up in stock will strangle your cash flow and reduce your ability to meet financial obligation as they fall due.
Positive Cash Flow
Cash, also known as ‘business oxygen’, is the most evidential sign of a strong balance sheet. Your business cannot breathe without cash flow. All businesses need cash to achieve their short-term goals – to pay employees, trade payables and a lot of other expenses. It’s therefore vitally important to manage cash flow through forecasting and budgeting.
Collect Debts
Cash is king. So chasing your customers who owe you money and getting this cash in your bank account while not altering your net asset position will mean you can disclose a healthy cash balance adding confidence to those reading your balance sheet.