When looking at a Balance Sheet, these 12 questions are all that you need:
A refresher: What is the Balance Sheet?
Assets = Liabilities + Stockholder’s Equity
OR
Assets - Liabilities = Stockholder’s Equity
â–¸ Asset = what you own
â–¸ Liability = what you owe
▸ Stockholder’s Equity = paper worth
Assets = Liabilities + Stockholder’s Equity
OR
Assets - Liabilities = Stockholder’s Equity
â–¸ Asset = what you own
â–¸ Liability = what you owe
▸ Stockholder’s Equity = paper worth
• How much cash runway do we have?
Cash is the most important number in your business.
If you don’t have cash, you don’t have a business.
You should understand:
â–¸ How much cash to keep on hand
â–¸ What to do with excess cash
â–¸ Cash Runway
Cash is the most important number in your business.
If you don’t have cash, you don’t have a business.
You should understand:
â–¸ How much cash to keep on hand
â–¸ What to do with excess cash
â–¸ Cash Runway
â–¸ How much cash to keep on hand
It’s typical to keep 6-12 months of expenses on hand.
Where fall in this depends on:
â–ą volatility of the industry
â–ą volatility of the company
â–ą capital costs of business
It’s typical to keep 6-12 months of expenses on hand.
Where fall in this depends on:
â–ą volatility of the industry
â–ą volatility of the company
â–ą capital costs of business
â–¸ What do with excess cash
This is a good problem to have, but still a problem.
Do you reinvest it in the company?
What about when you can no longer reinvest it?
You need to have a plan.
This is a good problem to have, but still a problem.
Do you reinvest it in the company?
What about when you can no longer reinvest it?
You need to have a plan.
â–¸ Cash Runway
Cash Runway = Total Cash Reserve / Burn Rate
Cash Burn Rate = (Cash Balance Beginning of Period – Cash Balance End of Period) / # of Months in Period
This is key for startups or cash-poor companies.
Cash Runway = Total Cash Reserve / Burn Rate
Cash Burn Rate = (Cash Balance Beginning of Period – Cash Balance End of Period) / # of Months in Period
This is key for startups or cash-poor companies.
• Can we pay our short-term obligations?
After understanding cash, this is the next most important.
Some helpful ratios to understand this are:
â–¸ Quick Ratio
â–¸ Current Ratio
After understanding cash, this is the next most important.
Some helpful ratios to understand this are:
â–¸ Quick Ratio
â–¸ Current Ratio
▸ Quick Ratio = Current Assets – Inventory / Current Liabilities
This measures your ability to meet your short-term obligations with your most liquid assets.
A higher ratio = better liquidity and financial health.
This measures your ability to meet your short-term obligations with your most liquid assets.
A higher ratio = better liquidity and financial health.
â–¸ Current/Working Capital Ratio = Current Assets / Current Liabilities
This measures your ability to pay obligations due within one year.
Remain above 1 to remain healthy, but too high means you’re using capital inefficiently.
This measures your ability to pay obligations due within one year.
Remain above 1 to remain healthy, but too high means you’re using capital inefficiently.
• Do I have enough cash to fund growth?
Growth is great, but it is also expensive.
Having a cash forecast helps you understand if you have the cash you need to support your growth.
Being able to predict your cash balance out into the future will improve your decisions.
Growth is great, but it is also expensive.
Having a cash forecast helps you understand if you have the cash you need to support your growth.
Being able to predict your cash balance out into the future will improve your decisions.
• Who owes me money?
Accounts Receivable is sales invoiced for but not yet paid.
Run an Accounts Receivable Aging and reach out to any invoices over 30 days old.
The sooner you contact someone, the more likely you are to get paid.
Accounts Receivable is sales invoiced for but not yet paid.
Run an Accounts Receivable Aging and reach out to any invoices over 30 days old.
The sooner you contact someone, the more likely you are to get paid.
• Is there enough Inventory?
Inventory management is a topic too complex to get into here, but
Understanding what “too much” vs “too little” will help you make buying decisions.
Bad inventory management can kill a company fast, so pay close attention to this.
Inventory management is a topic too complex to get into here, but
Understanding what “too much” vs “too little” will help you make buying decisions.
Bad inventory management can kill a company fast, so pay close attention to this.
• What assets did I buy?
When buying long-term assets, they’ll show up in the Non-Current Assets section of your Balance Sheet.
Purchasing assets require money or debt.
Knowing what assets are purchased helps you better understand your cash outflow and future commitments.
When buying long-term assets, they’ll show up in the Non-Current Assets section of your Balance Sheet.
Purchasing assets require money or debt.
Knowing what assets are purchased helps you better understand your cash outflow and future commitments.
• How much money do I owe others?
Under Liabilities, you need to understand Current and Non-Current Liabilities.
Current are due in < 1 year. Non-Current are due in > 1 year.
Paying timely on current and understanding your debt load (non-current) helps you manage your cash.
Under Liabilities, you need to understand Current and Non-Current Liabilities.
Current are due in < 1 year. Non-Current are due in > 1 year.
Paying timely on current and understanding your debt load (non-current) helps you manage your cash.
• Are we over-leveraged?
Too much debt can be disastrous.
Debt-to-equity Ratio = Debt / Equity
Less than 1 = safe
Greater than 2 = risky
Watch your monthly trends and look to industry averages.
Too much debt can be disastrous.
Debt-to-equity Ratio = Debt / Equity
Less than 1 = safe
Greater than 2 = risky
Watch your monthly trends and look to industry averages.
• What is the book value of the company?
A company's book value is the balance of Stockholder’s Equity.
Negative book value means you are technically insolvent.
Book value ≠sale value but whether it’s rising or falling can tell you a lot about the health of the company.
A company's book value is the balance of Stockholder’s Equity.
Negative book value means you are technically insolvent.
Book value ≠sale value but whether it’s rising or falling can tell you a lot about the health of the company.
• What are our capital needs?
Are you growing?
Do you need inventory?
Do you need more equipment?
All of these things require capital.
You can fund them from:
â–¸ Loans
â–¸ Cash from profits
â–¸ Cash from collecting receivables
â–¸ Owner contributions
Are you growing?
Do you need inventory?
Do you need more equipment?
All of these things require capital.
You can fund them from:
â–¸ Loans
â–¸ Cash from profits
â–¸ Cash from collecting receivables
â–¸ Owner contributions
• What’s my return on investment?
When funding a company, you want returns greater than the alternatives (real estate or the stock market).
Return on Equity = Net Income / Shareholder’s Equity
Ideally, you should be generating 15-20% or more return on equity.
When funding a company, you want returns greater than the alternatives (real estate or the stock market).
Return on Equity = Net Income / Shareholder’s Equity
Ideally, you should be generating 15-20% or more return on equity.
• How does this period compare to last?
One period by itself is only part of the picture.
You always want to look at trends to get a feel for how the company is changing.
Look at the last period, but also the same time period from the last 1-3 years.
One period by itself is only part of the picture.
You always want to look at trends to get a feel for how the company is changing.
Look at the last period, but also the same time period from the last 1-3 years.
Looking at any statement alone will not give you a full picture. Last week I broke down 7 questions to ask when looking at the Income Statement.
You can read that here:
You can read that here:
If you're a business owner or leader and don't feel confident looking at a financial statement, my 2 week cohort will help you:
• decode financial statements
• understand what metrics to track
• speak confidently with others
Apply today:
kurtishanni.com
• decode financial statements
• understand what metrics to track
• speak confidently with others
Apply today:
kurtishanni.com
TL;DR
12 questions to ask the Balance Sheet:
Can we pay current obligations?
Current vs last period/year?
What assets did I buy?
Can we fund growth?
How much do I owe?
What's our leverage?
What is inventory?
How much cash?
Who owes me?
Capital needs?
What is ROE?
Book value?
12 questions to ask the Balance Sheet:
Can we pay current obligations?
Current vs last period/year?
What assets did I buy?
Can we fund growth?
How much do I owe?
What's our leverage?
What is inventory?
How much cash?
Who owes me?
Capital needs?
What is ROE?
Book value?
Every Thursday I write a newsletter and share 1 framework and 1 financial concept.
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kurtishanni.com
Subscribe here:
kurtishanni.com
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