Balance Sheet Analysis For CEO's and Small to Medium Sized Business Owners
I'm providing this Sample Balance Sheet Analysis (below-attached Excel spreadsheet) for review and comment by my fellow CEO's and Business Owners as a way to spark a conversation that is becoming so important to many of us. There are several well-known "ratios" or metrics that are used to determine the "current state" of our businesses and operations. This Workbook reviews these ratios and provides a tool for anyone to do a quick analysis of their business.
We can use these ratios to examine our current financial condition, and possibly make changes to our strategy to affect changes in our financial position. But which ratios are particularly applicable to showing the "true" nature of our financial condition? I would say that the the most important are what are considered the "Capital Ratios" (aka "Short Term Solvency"), which measure the ratio of equity capital to total assets, and the "Liquidity Ratios" (aka "Long-term Solvency or Leverage), measuring our ability to cover outstanding debt service and/or payables to our creditors or vendors, respecitvely. And what are the bank credit officers using to evaluate our creditworthiness to determine if they are willing to lend us money? The most widely used is known as the "acid-test ratio" or "quick ratio".. calculated by short-term assets divided by current liabilities. Another is the "current ratio" (current assets divided by current liabilities); and the "debt coverage ratio" (working capital divided by long-term debt). These financial ratios can be measured against ratios in prior years, or industry averages, for quick, easy comparison. Key performance ratios, such as the "leverage ratio" (long-term debt as a percentage of owner/shareholder net worth), are frequently used in pricing commercial loans. I would advise any business owner or CEO (regardless of company size), to become highly familiar with these ratios and how their income and expense activity can affect each on a quarterly basis. If this seems like "rocket science" to you, then I would highly advise visiting this conversation with your CPA or accountant to learn more. (Otherwise, give me a call and we can discuss over a cup of coffee :) John
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