The balance sheet reveals business insights on cash flow, business efficiency, debt management and business risk. These are the things bankers want to know to understand the risk of business failure. What should you look for in your balance sheet? Get the straight-forward answer here.
The Balance Sheet:
Helps business owners monitor asset management, cash flow, liquidity, and debt control.
Why Lenders Prioritize the Balance Sheet:
It provides insight into a business’s debt levels and overall financial risk — crucial for evaluating creditworthiness.
Defining Liquidity:
Liquidity refers to a company’s ability to pay bills as they come due — a key measure of short-term financial health.
Purpose of Accumulated Depreciation:
Reflects the reduction in value of fixed assets over time, aligning financial records with the reality of asset wear and tear.
Understanding “Book to Tax Difference”:
Arises when different accounting methods are used for financial reporting versus tax filing, affecting how income and expenses are recorded.
The Current Ratio Explained:
Compares current assets to current liabilities — a vital measure of a company's ability to cover short-term obligations.
Consequences of a Low Current Ratio:
Falling below a loan covenant requirement can lead lenders to reduce or withdraw lines of credit, signaling financial instability.