Build a balance sheet-driven company

If you are focusing only on expenses and profits, you may be overlooking both the opportunities and the dangers that a deeper analysis of your balance sheet can expose:

Solvency
How well are you able to meet your debt obligations in the short term? Before approving a loan, a banker will undoubtedly do an acid test on your balance sheet. Also called the Quick Ratio, this compares short-term cash to short term debt [Cash + Accounts Receivable / Current Liabilities]. A value between 0.5 and 1.1 is considered healthy, but the higher the score the better.

If your business has inventory, also look at the Current Ratio [Current Assets / Current Liabilities]. In most industries, a value of two is considered a good minimum.

Another prime measure of solvency is the Debt-to-Equity ratio [Total Liability / Total Tangible Owner's Equity], which tells a lender how much of the business risk he's taking. Many private companies have very little equity, but when this number starts heading toward double digits, it's time to consider decreasing bank debt.

Efficiency
Are you making the most of the cash in your business? The first place to look is accounts receivable. Calculate how long it takes to collect payment, called Days Outstanding [Accounts Receivable / Annual Sales x 365]. For invoice-based companies, the national average is about 45 days, but shorter is better.

When cash is tight, the next suspect is inventory — keeping too much locks up cash that may be needed in other areas. Calculate your Inventory Turnover [Annual Cost of Goods Sold / Average Value of Inventory] to see how many times your inventory turns over each year. Larger numbers are better — indicating that you are not locking up cash in excess inventory. Use the average value of your inventory and compare your result to other companies in your industry.