As media outlets consistently report, and as we have all experienced firsthand, the challenges of 2020 were not planned for, expected or even imagined. Many business owners still struggle to find footing today amidst the COVID-19 pandemic and political and economic unrest and are doing what they feel is best to get an immediate sense of safety, comfort and support. Though this may seem sustainable now, it’s best to embrace a forward-thinking approach when it comes to managing your construction or real estate business. This can help solve the current critical needs of your business and contribute to a profitable future.
In this article, we discuss why maintaining a strong balance sheet is a key factor in surviving an economic downturn.
The Importance of the Balance Sheet
The balance sheet shows a company’s financial position at a certain point in time through the valuation of assets and liabilities. There are many financial ratios that banks and investors will use to determine the financial strength of a company. While these ratios can be complex, it’s important for business owners to focus on a few to keep the business operating in the short-term, while building for the long-term.
Fine-tune your reporting
When analyzing your balance sheet, you must have accurate, reliable, real-time reporting. One of the most important balance sheet ratios is your working capital. This shows how current assets compare to current liabilities. The higher this number, the stronger your overall position. If you find that you need to improve your working capital, there are steps you can take:
- Verify all current receivables are reported.
- Collect on past due receivables to generate cash.
- Accurately state and manage inventory.
- Essential or revenue generating equipment should not be sold. These assets are needed to add value to your financial position and for future work, when economic conditions will allow you to expand.
- Sell excess or non-essential equipment to generate cash.
- Refinance debts that are coming due in the next year.
Another important ratio to consider when creating a secure balance sheet is your debt–to–equity ratio. In this case, the lower the ratio, the stronger the company’s equity position. Banks and investors will use this ratio as a guideline for your company’s ability to last through the downturn and provide you with the assistance needed both now and in the future. To strengthen this position, you may reduce or cut owner dividends or distributions. You must also look at managing discretionary payments and consider how expenses can be realigned. This may include an owner reduction in salary to ensure that other operational and personnel expenses can remain.
Focus on strengthening assets, reevaluating debt and strategically cutting expenses so you can be prepared to expand as we enter an economic recovery period. While you need to manage your current operations, always keep in mind the long-term goals. A strong balance sheet position will continue to help guide the success of your business growth, even if our current environment continues to present uncertainty.