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)


What questions does the balance sheet answer? ›

The balance sheet can help users answer questions such as whether the company has a positive net worth, whether it has enough cash and short-term assets to cover its obligations, and whether the company is highly indebted relative to its peers.

How to build a strong balance sheet? ›

Strengthening your balance sheet
  1. Improve inventory management. If you trade in goods, review your inventory levels immediately. ...
  2. Review your procurement strategy. ...
  3. Look at the collection of your receivables. ...
  4. Sell lazy and unproductive assets. ...
  5. Maintain a forward focus.

How to determine if a balance sheet is strong? ›

The strength of a company's balance sheet can be evaluated by three broad categories of investment-quality measurements: working capital, or short-term liquidity, asset performance, and capitalization structure. Capitalization structure is the amount of debt versus equity that a company has on its balance sheet.

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 balance sheet audit answer? ›

Balance Sheet audit is done to list down all the assets and liabilities of the organization on a particular date. This requires the verification of all records related to the items of balance sheet i.e. assets and liabilities.

What are the golden rules of accounting? ›

Every economic entity must present accurate financial information. To achieve this, the entity must follow three Golden Rules of Accounting: Debit all expenses/Credit all income; Debit receiver/Credit giver; and Debit what comes in/Credit what goes out.

What can a business do to create a strong balance sheet? ›

To build a strong company balance sheet, you must curate your finances in a way that: Maintains a high level of capital (so you have the cash flow and working capital to trade). Drives optimum performance and generates equity (profits).

What are the weakness of balance sheet? ›

The three limitations to balance sheets are assets being recorded at historical cost, use of estimates, and the omission of valuable non-monetary assets.

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

The balance sheet displays:
  • The portion of those assets financed with debt (liability)
  • The portion of equity (retained earnings and stock shares)
  • Assets listed in order from most liquid to least liquid (in other words, assets that can be most quickly converted to cash are listed first)

What ratio is considered a strong balance sheet? ›

Most analysts prefer would consider a ratio of 1.5 to two or higher as adequate, though how high this ratio depends upon the business in which the company operates. A higher ratio may signal that the company is accumulating cash, which may require further investigation.

How to tell if a company is doing well financially? ›

There are many ways to evaluate the financial success of a company, including market leadership and competitive advantage. However, two of the most highly-regarded statistics for evaluating a company's financial health include stable earnings and comparing its return on equity (ROE) to others in its market sector.

What is a good CFO ratio? ›

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

What ratios do CFO look at? ›

What KPIs Should be in a CFO's Dashboard?
  • Quick Ratio.
  • Current Ratio.
  • Working Capital.
  • Operating Cash Flow.
  • EBITDA & EBITDA Growth.
  • Return on Equity.
  • Total-Debt-to-Equity Ratio.
  • Accounts Payable Turnover.
Mar 28, 2024

What is CFO on balance sheet? ›

Cash flow from operating activities (CFO) indicates the amount of money a company brings in from its ongoing, regular business activities, such as manufacturing and selling goods or providing a service to customers. It is the first section depicted on a company's cash flow statement.

What does the balance sheet tell you? ›

The balance sheet provides information on a company's resources (assets) and its sources of capital (equity and liabilities/debt). This information helps an analyst assess a company's ability to pay for its near-term operating needs, meet future debt obligations, and make distributions to owners.

What is the main point of the balance sheet? ›

The purpose of a balance sheet is to reveal the financial status of an organization, meaning what it owns and owes. Here are its other purposes: Determine the company's ability to pay obligations. The information in a balance sheet provides an understanding of the short-term financial status of an organization.

What information does the balance sheet summarize? ›

A balance sheet summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. It is one of the fundamental documents that make up a company's financial statements.

What is balance sheet answer in only one sentence each question? ›

What is balance sheet answer in one sentence? A balance sheet is a financial statement that summarizes a company's assets, liabilities, and shareholders' equity at a specific point in time.

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