Balance sheets

Compare balance sheets to assess business performance

Guide

There are some simple balance sheet comparisons you can make to assess the strength or performance of your business against earlier periods, or against direct competitors. The figures you study will vary according to the nature of the business. Some comparisons draw on figures from the profit and loss (P&L) account.

Internal comparisons

If inventory (stock) levels are rising from one period to the next, but sales in your P&L are not, some of your stock might be out of date. You may also have a cashflow problem developing - see cashflow management.

If the amount trade debtors owe you is growing faster than sales, it could indicate poor internal credit controls. Find out whether any of your customers are having problems with cashflow, which could pose a threat to your business.

A positive relationship with your trade creditors is essential. Key to this is managing your cashflow effectively, so that payments can be made on time. For example, trade creditors are more likely to be flexible about extending terms of credit if you have built up a good payment record.

Making early payments may qualify you for a discount. However, early payment for the sake of it will have a negative impact on your cashflow. Good payment controls will help prevent imbalances in what you owe suppliers and in levels of stock and inventory.

Borrowing as a percentage of overall financing (gearing) is important - the lower the figure, the stronger your business is financially. It's common for start-up businesses to have high borrowing requirements, but if the gearing figure reaches 50 per cent you may have difficulty getting further loans.

External comparisons

You can also compare the above balance sheet figures with those of direct or successful competitors to see how you measure up.  See use accounting ratios to assess business performance.

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