Is Your Balance Sheet Strong Enough To Raise Capital?

Post written by

Jennifer Barnes

Founder & CEO of Optima Office, LLC. Jennifer is a tenacious entrepreneur who enjoys jogging on the beach and snowboarding.

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The ability to raise capital is essential to keep your business growing and thriving. However, if you want to attract interest from potential investors or secure a loan, your balance sheet becomes a tool that can help you prove your worth. As the leader of an accounting services team that handles accounts receivable, among other functions, improving a business’s balance sheet is a process with which I’m well familiar.

Essentially, a balance sheet is a financial statement that outlines the assets and liabilities of your company. It gives a basic explanation of ownership versus debt. While it would be easy to assume that simply having more assets than debt would suggest you have a strong balance sheet, as with many aspects of finance, it's just not that simple. 

Let’s assume you need to raise funds for business growth, for example. When an investor wants to get a grasp on the ability of your company to make wealth, it’s not enough to add and subtract the numbers. They’ll dig deep into your balance sheet to gain insight into the way you use money in your business. 

More Than Just Numbers

A balance sheet is more about ratios than raw numbers. Financial assets are made up of four important factors. While each of these is important, they aren't necessarily created equal. Some assets have the potential to generate income, but individual circumstances surrounding them lower the realistic value. These four factors work together to make up the financial assets included in a company's balance sheet.

• Working capital: While having a substantial sum of money in the bank might look like a good thing, it could mean you aren't using the money to run a better business. Investors need to see your ability to use money to generate more income in the future. Intelligent working capital strikes a balance between the available funds and money tied up in business obligations.

• Cash flow: Evidence of being able to sustain positive cash flow is the most noticeable feature of a strong balance sheet. The ability to keep a reserve amount of cash on hand necessary for immediate spending is a positive trait of an organization with positive cash flow. This is accomplished by consistently studying past habits to predict future outcomes.

• Capital structure: It's often necessary for businesses to incur debt in order to generate profit in the future. A strong balance sheet will show quality financial planning in the type of debt incurred. While debt can be a cheaper source of financing, it carries greater risk than equity financing. A healthy capital structure shows the ability to capitalize on borrowing at the right time when interest rates are low. 

• Income-generating assets: Financial investments can make a business stronger. However, they don't always yield the expected results. A strong balance sheet will provide evidence of the company's ability to stay current on which investments are earning the most money and move away from those that were less successful.

How Accounts Receivable Fits Into The Mix

A company's accounts receivable (AR) should generally be regarded as a financial asset. However, not every entry in your AR balance will be considered positive by investors. Delayed AR collections can be a major drawback when potential investors are investigating your company. For instance, invoices that have passed the dreaded 90-day mark aren't included in the calculation. 

Additionally, investors may calculate the concentration of each customer's impact on the overall AR balance. If one customer makes up more than a set percentage (for example, 20%) of receivables, that balance is discounted or eliminated from the borrowing balance.

Creating A Stronger Balance Sheet

Understanding your company's ratios is the first step toward making your balance sheet more attractive to investors and lenders. Instead of simply determining the raw value of a company, investors must consider other factors to ensure they will get a return on investment. A strong balance sheet will demonstrate the current value of the business, an honorable debt history and wise spending techniques that make the most of cash flow. Take these steps to improve the weak points within your balance sheet.

• Decrease liabilities. Your balance sheet compares the ratio of debt to assets. Lowering the company's liabilities will automatically give the appearance of increased assets.

• Shift inventory. Inventory can be an asset to a company, but storing excess inventory for long periods of time can get costly. If your inventory isn't effectively bringing in revenue, getting rid of it could reduce lost income in the future.

• Improve your credit score. While a good credit score might not directly affect your balance sheet, it should be of interest to potential investors. An investment-grade rating could be an indication of a strong balance sheet.

• Get AR under control. If your AR collections process is weak, the resulting late payments could have a negative effect on your balance sheet. 

• Analyze your assets. If your assets aren't working for the company, they can quickly become a liability. Sell off any assets that aren't generating the wealth you anticipated and invest in the ones that are.

• Balance cash flow. Your cash flow is the amount of income generated during a specific timeframe, minus the company's expenses. Finding ways to lower expenses or bring in more money will create better cash flow and a stronger balance sheet.

• Always look ahead. Anticipating the future is a trademark of good business. The ability to always look around the corner can allow you to anticipate threats as well as take advantage of opportunities to save money. Predictions help strong businesses prepare for financial downturns and give them the ability to weather periods of economic uncertainty.

A strong balance sheet is a vital tool to prove the potential of investing in your business. Taking the time to strengthen your balance sheet can ensure you have the ability to get the financial assistance your company requires to survive financial downturns and promote growth for a healthy business future.

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Getty
The ability to raise capital is essential to keep your business growing and thriving. However, if you want to attract interest from potential investors or secure a loan, your balance sheet becomes a tool that can help you prove your worth. As the leader of an accounting services team that handles accounts receivable, among other functions, improving a business’s balance sheet is a process with which I’m well familiar.

Essentially, a balance sheet is a financial statement that outlines the assets and liabilities of your company. It gives a basic explanation of ownership versus debt. While it would be easy to assume that simply having more assets than debt would suggest you have a strong balance sheet, as with many aspects of finance, it's just not that simple. 

Let’s assume you need to raise funds for business growth, for example. When an investor wants to get a grasp on the ability of your company to make wealth, it’s not enough to add and subtract the numbers. They’ll dig deep into your balance sheet to gain insight into the way you use money in your business. 

More Than Just Numbers

A balance sheet is more about ratios than raw numbers. Financial assets are made up of four important factors. While each of these is important, they aren't necessarily created equal. Some assets have the potential to generate income, but individual circumstances surrounding them lower the realistic value. These four factors work together to make up the financial assets included in a company's balance sheet.

• Working capital: While having a substantial sum of money in the bank might look like a good thing, it could mean you aren't using the money to run a better business. Investors need to see your ability to use money to generate more income in the future. Intelligent working capital strikes a balance between the available funds and money tied up in business obligations.

• Cash flow: Evidence of being able to sustain positive cash flow is the most noticeable feature of a strong balance sheet. The ability to keep a reserve amount of cash on hand necessary for immediate spending is a positive trait of an organization with positive cash flow. This is accomplished by consistently studying past habits to predict future outcomes.

• Capital structure: It's often necessary for businesses to incur debt in order to generate profit in the future. A strong balance sheet will show quality financial planning in the type of debt incurred. While debt can be a cheaper source of financing, it carries greater risk than equity financing. A healthy capital structure shows the ability to capitalize on borrowing at the right time when interest rates are low. 

• Income-generating assets: Financial investments can make a business stronger. However, they don't always yield the expected results. A strong balance sheet will provide evidence of the company's ability to stay current on which investments are earning the most money and move away from those that were less successful.

How Accounts Receivable Fits Into The Mix

A company's accounts receivable (AR) should generally be regarded as a financial asset. However, not every entry in your AR balance will be considered positive by investors. Delayed AR collections can be a major drawback when potential investors are investigating your company. For instance, invoices that have passed the dreaded 90-day mark aren't included in the calculation. 

Additionally, investors may calculate the concentration of each customer's impact on the overall AR balance. If one customer makes up more than a set percentage (for example, 20%) of receivables, that balance is discounted or eliminated from the borrowing balance.

Creating A Stronger Balance Sheet

Understanding your company's ratios is the first step toward making your balance sheet more attractive to investors and lenders. Instead of simply determining the raw value of a company, investors must consider other factors to ensure they will get a return on investment. A strong balance sheet will demonstrate the current value of the business, an honorable debt history and wise spending techniques that make the most of cash flow. Take these steps to improve the weak points within your balance sheet.

• Decrease liabilities. Your balance sheet compares the ratio of debt to assets. Lowering the company's liabilities will automatically give the appearance of increased assets.

• Shift inventory. Inventory can be an asset to a company, but storing excess inventory for long periods of time can get costly. If your inventory isn't effectively bringing in revenue, getting rid of it could reduce lost income in the future.

• Improve your credit score. While a good credit score might not directly affect your balance sheet, it should be of interest to potential investors. An investment-grade rating could be an indication of a strong balance sheet.

• Get AR under control. If your AR collections process is weak, the resulting late payments could have a negative effect on your balance sheet. 

• Analyze your assets. If your assets aren't working for the company, they can quickly become a liability. Sell off any assets that aren't generating the wealth you anticipated and invest in the ones that are.

• Balance cash flow. Your cash flow is the amount of income generated during a specific timeframe, minus the company's expenses. Finding ways to lower expenses or bring in more money will create better cash flow and a stronger balance sheet.

• Always look ahead. Anticipating the future is a trademark of good business. The ability to always look around the corner can allow you to anticipate threats as well as take advantage of opportunities to save money. Predictions help strong businesses prepare for financial downturns and give them the ability to weather periods of economic uncertainty.

A strong balance sheet is a vital tool to prove the potential of investing in your business. Taking the time to strengthen your balance sheet can ensure you have the ability to get the financial assistance your company requires to survive financial downturns and promote growth for a healthy business future.

Young Entrepreneur Council (YEC) is an invitation-only, fee-based organization comprised of the world's most successful entrepreneurs 45 and younger. YEC members repre...">Young Entrepreneur Council (YEC) is an invitation-only, fee-based organization comprised of the world's most successful entrepreneurs 45 and younger. YEC members repre...