Using Balance Sheet Data

April 13, 2006

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You don't have to be an accountant to make effective use of the data on your balance sheet. Use balance sheet data to monitor your company's financial health by monitoring the following:

Working capital: maintain a proper ratio of current assets to current liabilities; otherwise the liquidity of the company may be compromised. Your bank may require you to maintain a certain level of working capital.
Cash levels: maintain only as much cash as needed; invest the excess in short-term investments.
Accounts receivable levels: monitor receivables levels to ensure customers are paying promptly and providing cash flow to your business.
Inventory levels: keep inventory as low as is reasonable for your business since the carrying costs associated with inventories are so high.
Fixed assets: analyze your property, plant, and equipment to see that these capital assets are being fully utilized and financed efficiently.
Accounts payable: keep an eye on accounts payable to make sure the company has enough liquidity to pay its bills.
Long-term debt: watch the company's debt-to-equity ratio and keep it in line with, or better than, industry norms.