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Managing and improving your cashflow requires a comprehensive financial system and an understanding of your financial statements.
A big part of managing cashflow is understanding and managing the balance sheet.
The basic balance sheet formula is:
Assets = liabilities + equity
Assets – liabilities = equity you have in your business, not unlike the mortgage on your house.
Your house is an asset. Subtract from that the mortgage that you owe the bank. And that’s the equity in your home. Same concept for your business.
You have both assets and liabilities in your business. The difference, hopefully a positive, is your equity.
Assets fall in two categories.
Current assets: Those which are liquid and supposedly within the next 12 months they can be turned into cash.
Long term assets: Those which are fixed assets- property, plant and equipment and intangible assets.
The key components of the balance sheet to manage your assets are accounts receivable and inventory.
The same categories apply to liabilities.
Current liabilities: Those you have to satisfy and pay out within the next year.
Long term liabilities: Notes payable to the bank, on the equipment or buildings, etc.
The key components of the balance sheet for liabilities are your current liabilities, vendors and creditors.
When managing your current liabilities you are paying out when you need to and not letting go of cash too soon. You’ll also be analyzing your vendors and creditors so you can pay out cash more slowly.
You’ll want to consider financing when looking at long term liabilities.
In other words, you don’t want to have a line of credit to finance seasonality in your business or downturns in your business and then have the bank talk you into turning that into a long term note payable.
These basics of the balance sheet are covered in more detail in our Ultimate guide to Cashflow. Download it here.