Business management: the three most important lines of a balance sheet
After surviving the first 18 to 24 months in business, he has graduated from the growth phase. During this phase of the business cycle, you have become accustomed to the various business models (ie, revenue model, operations model, sales model, etc.) required to run your business effectively. You have progressed in learning how to run your business from a financial statement analysis perspective. The hectic activity of starting the business and keeping the momentum going in the market has become second nature to you. You are guided to make strategic decisions based on the information provided by the company’s financial statements, especially the balance sheet. 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 goes: “Whoever has the most gold makes the rules !!!” Of course, we know that when the bank account is constantly low for the company, thoughts begin to arise in your mind about possible failures and subsequent bankruptcy. Before you get to this extreme, you should proactively study the trend of trading cash on a monthly and weekly basis. This level of supervision helps to minimize the impact of any sudden changes in the market. It is recommended that the company have a minimum cash reserve for operating expenses of 6 months.
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 tell-tale sign of the profitability of the business and its longevity. Often times, the profitability of the business is diminished by a large dependency debt to finance operations. If used to strategically invest and grow the business through acquisitions, corporate debt is considered a good thing. The key to managing corporate debt effectively is to use it wisely for strategic business purposes that ultimately increase and stabilize the company’s operating cash flows.
Number three: retained earnings
In conclusion, you should pay attention to the trend of retained earnings on the balance sheet. Retained earnings are an account item on the balance sheet that measures the profitability of the business over a specified period of time. Investors thoroughly study trends in retained earnings because it represents a business owner’s ability to manage the business effectively. Furthermore, it is through retained earnings that the income statement ‘flows’ into the balance sheet at the close of the accounting year. Even you, as a business owner, can measure the return on your investment by understanding the trend of retained earnings.
If during the growth phase of the business cycle it becomes a habit to manage and grow the business effectively by understanding the 3 balance lines of cash, total liabilities and retained earnings, it will increase the operating cash flow of the company. long-term company. -finished. Additionally, they can help guide you in developing and implementing key business strategies that will position the company for greater market share.