After surviving the initial 18 to 24 months in business, you have graduated into the growth phase. During this business cycle phase, you have become accustomed to the various business models (i.e. revenue model, operations model, sales model, etc.) it takes to run your business effectively. You have progressed in learning to manage your business from a financial statement analysis perspective. The hectic activity of starting up the business and maintaining momentum in the market have become second nature to you. You’re guided into making strategic decisions based on the information provided by the business’s financial statements especially the balance sheet. In order to employ effective business management strategies, you must have a fundamental understanding of the 3 most important lines on the balance sheet: cash, total liabilities, and retained earnings.
Number One: Cash
An old saying states, ‘He who has the most gold, makes the rules!!!’. Sure, we know when the bank account is a consistently low for the business, thoughts begin to loom in your mind about potential failure and subsequent bankruptcy. Before reaching this extreme, you must proactively study the business cash trend on a monthly and weekly basis. This level of oversight helps to minimize the impact of any sudden changes in the market. It’s recommend that the business have a minimum cash reserve of 6 months operating expenses.
Number Two: Total Liabilities
The second most important line item on the balance sheet in terms of effective business management is the trend in Total Liabilities. For business management purposes, the trend in total liabilities is a telltale sign of the profitability of the business and its longevity. Often, the profitability of the business is diminished by heavy reliance debt to fund operations. If used to invest and grow the business strategically through acquisitions then business debt is considered a good thing. The key to managing business debt effectively is to use it wisely for strategic business purposes that ultimately increase and stabilize the operating cash flows of the business.
Number Three: Retained Earnings
In conclusion you must pay attention to the trend in retained earnings on the balance sheet. Retained earnings is an account line item on the balance sheet that measures the profitability of the business over a specific range of time. Investors thoroughly study the trends in retained earnings because it represents a business owner’s ability to manage the business effectively. Also, it’s through retained earnings that the income statement ‘flows’ into the balance sheet upon closing out the accounting year. Even you as a business owner can measure the return on your investment by understanding the trend in retained earnings.
If you make it a habit during the growth phase of the business cycle to effectively manage and grow the business by understanding the 3 balance sheet line items of cash, total liabilities, and retained earnings, then you will increase business operating cash flow for the long-term. Also, they can help in guiding you to develop and implement key business strategies that will position the business for increased market share.
jerichobizfinance.com is an online platform that specializes in providing expert level advice and guidance to the micro entrepreneur in the areas of accounting / finance, operations, management, sales and marketing, human resources, and lending in order to help grow your business and maximize your cash flow