What Should A Healthy Balance Sheet Show?
As previously mentioned, once you figure out how to write a balance sheet, you can use it as an assessment. There are many insights that can help reviewers ascertain important elements about a company. The most crucial areas to pay attention to are accounts receivables, cash, and debt obligations.
These numbers basically tell you or potential investors how much money is coming in, how much money you have on hand, and how much money you owe. By looking at balance sheets from different dates, analysts can determine whether a balance sheet looks healthy by focusing on the relationships between these numbers. Here are two other critical factors to think about:
Equal Capital Structure
The balance sheet will show what kind of relationship you have between equity and debt. Equity financing is more expensive than debt, but doesn’t require payments during periods of lower revenue. Debt, on the other hand, is cheaper to acquire, but can be particularly troublesome to pay back. The idea is to keep an equilibrium between the two and strategically borrow debt when interest rates are low.
Smart Working Capital
Having enough money on hand is essential for every business. At the same time, that same cash can be put to much more effective use, such as investing in higher interest assets, issuing dividends, and paying off debts. In addition, keeping an ample amount of inventory on hand is crucial to maintaining consistent sales. As such, finding a sweet spot for your working capital (that is, having cash on hand and ample inventory and smart investments) is a must.