Whether you are watching the newest episode of Shark Tank or reading the headlines on Forbes, it seems like many startup companies are having all of the fun. They create new markets, disrupt longstanding competitors, and attain large amount of financial funding from various venture capital firms. While the idyllic stereotype seems nice, the harsh truth is that 90% of all startups tend to fail.
There can be a variety of reasons of why so many startups tend to fail. Sometimes it could be because of the lack of management. Other times it is because of the product or service itself. But the main reason why startups, and even well standing businesses, fail is that they do not look at the numbers. When running a business, you need to make sure that you are internalizing the overall value of your company. By understanding the financial health and financial position of your company, you will be able to move your company to the right path for success. To do this, you need to periodically analyze the company’s balance sheet.
A balance sheet is the primary financial tool for assessing the relative health and financial condition of a business at any given point in time. Oftentimes, this is referred to as a snapshot because it provides a business leader with a clear and accurate picture of where the business is at that current moment. When analyzing your balance sheet you will often find that the finances are broken down into various ratios. With these ratios, you will find three major categories: assets, liabilities, and equity. These three figures will give you the necessary knowledge to financially view and evaluate your company in the right direction.
When we are talking about assets, we are generally referring to the economic value that an individual, firm, or company owns and controls. This figure is often compared against a company’s liabilities. Liabilities, by definition, are a company’s legal debt and expense obligations that arise during the course of a business operation. By taking the asset amount and the liability amount, you are able to find the stockholders’ or owners’ overall equity and net worth of the company. Equity is found by simply finding the difference between the assets and the liabilities.
By internalizing and comprehending these numbers, you will be able to ascertain the overall financial health and status of your business. In addition, the balance sheet will give you access to the solvency of your business, the overall proprietary interest you get as an owner, your company’s working capital, inventory levels, and most importantly, your company’s long-term debt. With this information, it is important that you take the time to understand what these numbers mean and how it can benefit you in the future. Remember, many companies often overlook these numbers. Do not make that same mistake. Calculate and compare those ratios so that you can better strategize the overall operation of your business. Doing this can often prevent those worst-case scenarios of bankruptcy and liquidation.