A balance sheet is a type of financial statement that reports a company's assets, liabilities, and shareholder equity at a point in time. A healthy balance sheet is one of the key points for investors to evaluate a business's financial health.
Previously, we have published a blog on telltale signs of a healthy balance sheet. So, what are the steps you can take to maintain your balance sheet's health? Or if you realize your balance sheet is unhealthy, what can you do to make ensure your company's financial health?
In this blog, we will outline a few simple steps you can take to maintain your balance sheet's health.
1. Improve inventory management
More inventories held in hand means lesser cash flow for your company as your cash is tied-up to the not-yet-productive assets. Furthermore, there is also a higher risk that your inventories will become obsolete or damaged. Thus, carefully monitoring how many inventories you hold from time to time is important.
You can start with identifying and clearing off unproductive inventories. The next thing you can do to better manage your company's inventories is to purchase inventories closer to the period when you're more ready to sell them. These can help strengthen your balance sheet.
2. Improve collection processes on your receivables account
Having an efficient process to ensure your debtors pay you on time will greatly strengthen your balance sheet health. It helps by ensuring your company cash is not tied up to your debtors and hence, increases your company cash flow. It also greatly reduces the risk of bad debts.
To improve your collection process by applying different payment terms depending on the debtors' credibility. You can reduce the number of days on your sales invoice if you think your debtors are okay with paying you more quickly. For debtors who are paying you after the due dates, you will need to work on ensuring them to pay on time. You can provide some incentives (e.g. small amount of discounts) to encourage prompt payment or enforce penalties for late payment. You can also provide pre-payment packages allowing your clients to pay half-yearly or annually depending on your nature of business.
3. Reduce company liabilities
Liabilities refer to the obligation that your company is required to pay in due time. Common liabilities are wages payables, bonds payables, and account payables. Having extremely high liabilities increases a company's risk of default. Hence, it is important to make sure your company's liabilities are in a safe range. Commonly used ratios to evaluate a company's financial health includes the Debt-to-Equity Ratio, Debt-to-Asset Ratio, Debt-to-Income Ratio, etc.
If your liabilities are currently on the higher end, you can try negotiating the terms and conditions with your creditors to lower the interest on some of your debts. When arranging priority for repayment, try to prioritize liabilities with the highest interest and clear them off first. This simple step can significantly reduce your liabilities in the long term. You can also seek to extend the duration of your loans to lower the monthly repayments. Besides, you'll also need to reduce non-essential spending to ensure you do not create unnecessary liabilities.
4. Conduct a SWOT analysis
SWOT analysis is a framework to help a company to identify Strengths, Weaknesses, Opportunities, and Threats that can be used to develop strategic planning. To continue maintaining a healthy balance sheet, you should maintain a forward focus mindset by asking yourself, what are your company's strengths and weaknesses? What are the new things out there that can help grow your company further? What are the threats to your company's current position? What plans should you make for your company's future? Your balance sheet should reflect the strategic planning you have for your company.
All in all, as a business owner, it is important to always ensure your company's financial is in healthy condition. Maintain a healthy balance sheet will help ensure your business' ability to grab hold of opportunities even when the economy is bad (e.g. when the Covid-19 pandemic hits the world).
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