Build a Strong Blaance Sheet - CFO Alliance (2024)

Success in any endeavor requires discipline. If you want to have six-pack abs and biceps like Chris Hemsworth, you eat your Wheaties and go to the gym. If you want to have healthy financial assets, you develop a strong balance sheet. Here’s how:

Understand Balance Sheet Vs. Income Statement

The balance sheet and the income statement work together hand-in-hand, linked by the equity section. Whatever income you generate is carried over to the balance sheet and reflected in equity. The difference is that the income statement shows revenue and expenses that equate to profit and loss of the business over time, while the balance sheet shows the overall financial position of the business in terms of assets and liabilities.

Get to Know Your Balance Sheet If you have never done much with your balance sheet, spend some quality time getting to know what it includes and how it functions. A few key ratios that will provide insight into the health of your balance sheet are:

  • Working Capital – Calculate working capital by subtracting current liabilities from current assets. This number shows you how much you have on hand to pay bills and manage day-to-day expenses of the business.
  • Debt to Equity Ratio Use this ratio to determine whether you have an appropriate amount of debt: not too much and not too little. A high debt-to-equity ratio is considered risky and may indicate that you are relying too heavily on debt to grow your business.
  • Fixed-Charge Coverage Ratio – This ratio measures EBITDA (minus capital expenses and taxes) against fixed charges such as interest and lease payments. A higher number corresponds with less financial risk. If this ratio is too low, you may not have enough capital to meet regular financial obligations.

Zoom In On Specifics As you saw in the example, a balance sheet is comprised of three categories of data:

    • Assets Assets include receivables, cash, inventory, investments, and other things that hold economic value. Having healthy assets means that your receivables are current, you have the right amount of cash (and a 13-week cash flow strategy to stay on track), your inventory is sustainable and meeting demand, and you have sufficient working capital.
    • Liabilities Liabilities include any debt associated with the business. This may include loans, accounts payable, mortgages, and expenses.
    • Equity When you subtract liabilities from assets, you get equity. This number shows the value inherent in the business for the owner and shareholders.
  • Don’t Ignore It!– Many founders are intimidated by their balance sheet, so they don’t pay much attention to it. But that can land you in serious financial trouble if you have insufficient working capital to handle unexpected changes. If you feel intimidated by the idea of managing your balance sheet, reach out for help. Whatever you do, don’t ignore it!

What Does It All Mean?

Having a strong balance sheet means that you have ample cash, healthy assets, and an appropriate amount of debt. If all of these things are true, then you will have the resources you need to remain financially stable in any economy and to take advantage of opportunities that arise.

If you’re not there yet, we can help! At CFO Alliance, we work with founders every day to build strong financial systems and processes that position companies for financial success. Contact us to see how we can help you build financial confidence and grow!

Build a Strong Blaance Sheet - CFO Alliance (2024)


How do you optimize a balance sheet? ›

In order to obtain balance sheet optimization, you need to look at your profitability in terms of the funds you're both lending and borrowing. Have you taken a step back to ascertain whether you are borrowing more than you need? Ask yourself the following, if not: Are you satisfied with your company's profitability?

What are operating activities in cash flow? ›

Cash flow from operations is the section of a company's cash flow statement that represents the amount of cash a company generates (or consumes) from carrying out its operating activities over a period of time. Operating activities include generating revenue, paying expenses, and funding working capital.

What should a good balance sheet look like? ›

A balance sheet should show you all the assets acquired since the company was born, as well as all the liabilities. It is based on a double-entry accounting system, which ensures that equals the sum of liabilities and equity. In a healthy company, assets will be larger than liabilities, and you will have equity.

What is the balance sheet strategy? ›

Effective balance sheet management is a cornerstone of Asset Liability Management (ALM) for banks and financial institutions. This strategic practice involves optimizing a bank's assets and liabilities to ensure financial stability, regulatory compliance, and long-term profitability while mitigating risks.

How should a balance sheet be organized? ›

The balance sheet is broken into two main areas. Assets are on the top or left, and below them or to the right are the company's liabilities and shareholders' equity. A balance sheet is also always in balance, where the value of the assets equals the combined value of the liabilities and shareholders' equity.

What is the golden balance sheet ratio? ›

This approach follows the so-called golden balance sheet rule: fixed assets and long-term current assets are financed by long-term capital. Working capital should have a ratio of 2 : 1 between current assets and current liabilities. In the case of negative working capital, the value is less than zero.

What are the most important metrics in balance sheet? ›

These metrics include the current ratio, quick ratio, working capital and debt-to-equity ratio. Each of these metrics' ideal value is highly dependent upon the nature of the business in which the company operates, but the numbers are telling all the same.

What are 3 characteristics of balance sheets? ›

A balance sheet is a financial statement that reports a company's assets, liabilities, and shareholder equity. The balance sheet is one of the three core financial statements that are used to evaluate a business. It provides a snapshot of a company's finances (what it owns and owes) as of the date of publication.

What is the formula for CFO? ›

Here's the formula to calculate a company's net CFO using the indirect method: Net cash from operating activities = Net income +/− depreciation and amortization +/− Change in working capital.

What is a good operating cash flow ratio? ›

Operating Cash Flow Ratio Analysis

Generally, a ratio over 1 is considered to be desirable, while a ratio lower than that indicates strained financial standing of the firm.

What are the three basic requirements of a balance sheet? ›

The balance sheet shows a company's assets, liabilities, and shareholders' equity at a particular point in time. The cash flow statement shows cash movements from operating, investing, and financing activities.

What is a high quality balance sheet typically has? ›

A high-quality balance sheet boasts a favorable mix of short and long-term assets, minimal unproductive assets, low debt relative to equity, and a robust liquidity position. It reflects the company's capacity to meet its obligations and invest in future opportunities.

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