Four Steps To A Stronger Balance Sheet

Here are four key steps to take in order to help your company strengthen its balance sheet against a possible downturn.

1. Review your company's balance sheet Identifying what’s most important. The balance sheet shows your company’s financial condition and includes a summary of its assets and liabilities at a specific point in time. Some items on the balance sheet are more critical than others to the success of your business. For example, inventory is a top priority for retailers, and accounts receivable is important to professional service firms.

Expressing line items on your balance sheet as a percentage of total assets can help you determine what’s most relevant. Items that represent the highest percentages are generally the ones that warrant the most attention.

2. Use ratios to assess the performance and viability of your business. Ratios compare line items on your company’s financial statements. They may be grouped into four categories: 1) profitability, 2) solvency, 3) asset management, and 4) leverage. While profitability ratios focus on the income statement, the others assess items on the balance sheet.

For example, the current ratio (current assets ÷ current liabilities) is a solvency measure that helps assess whether your company has enough current assets to meet current obligations over the short run. Conversely…