How Healthy Is Your Enterprise?
Is your company healthy or unhealthy?
One of the easiest, most effective ways to answer that question is to create a classic balance sheet for your business. It is a simple document to put together, yet it can reveal small “illnesses” in your business that will lead to larger problems later on.
A balance sheet is really a snapshot that shows the financial condition of your company, as expressed by its net worth:
The net worth of your business = Assets - Liabilities
Assets are everything that is owned by your business, plus everything that is owed to you. Assets include property owned, equipment and machinery, company vehicles, cash, accounts receivable, inventory and supplies, short-term investments and all other current and future assets.
Liabilities are everything that your business owes. Liabilities include long-term debt load, loans and notes payable, payroll owed, accounts payable and deferred income taxes.
Net worth is what your business is worth after all the liabilities have been satisfied. It is also referred to as your equity or book value.
The healthiest enterprises have robust assets and net worth - and minimal liabilities. The weakest are just the opposite, with skimpy assets and net worth and life-threatening liabilities.
So, is your business healthy or not? As a rule of thumb, the ratio of your current assets to your total current liabilities (sometimes called your current ratio) should be greater than 2. For another perspective, your ratio of total liabilities to net worth (your debt to equity ratio) should remain below 1.
Create a projected balance sheet for the way your company will look a year from now too. That will be a revealing exercise indeed. And remember, the smallest steps you take today to increase your assets and reduce your liabilities will determine how robust your enterprise will become in the years and decades to come.
Related Articles:
