EP.32 – How to Read and Interpret a Balance Sheet - Part 7

Welcome to another exciting episode of Startup Your Small Business and Learn. Hosted by Ola Williams, this podcast aims to enable budding entrepreneurs with the psychology of retail and enhance financial awareness, all while staying positively optimistic.

In this episode, we continue to delve into the world of balance sheets, explaining how you can negotiate your payables to effectively improve your financial standing. Entrepreneurial success comes down to strategic management of liabilities—something that has been discussed extensively in previous episodes. It's all about your business's ability to not feel pressured and to have the freedom to operate smoothly.

But what about the warning signs on your balance sheets? Are there obvious signs of danger? And are there practical steps you can take to maintain balance? Drawing from years of experience as an accountant, Ola Williams advises that assets must be capable of generating cash to ensure your business's survival. The secret lies in turning these assets into liquid cash, often referred to as 'working capital'.

Further, your current assets could be cash in the bank or items that can easily be converted to cash. But if you're finding that your current liabilities exceed these, then you may be in financial distress, and it might be time to reassess your small business's financial standing.

By the end of this episode, you should understand balance sheets better - from a non-finance background lens and you should be equipped to spot trouble in your finances and, with the strategies shared, be able to navigate through them.

Remember to apply these lessons according to your personal circumstances and seek professional advice when necessary. Please do share the show to foster a community of startup solopreneurs learning together.

Stay tuned for the concluding episode of the series.

This episode is part of an ‘8-series’ show on how to read and interpret a balance sheet. This is part 7.  

Do you have questions or comments? Your feedback ensures that we continue to give you content that adds value to you, fuelling our commitment to providing high-quality content and fostering a community of informed and successful entrepreneurs. Leave your voice note here

We are arranging to bring a guest who recently won a pitch competition to share ideas on effective ways to pitch ideas as entrepreneurs. Ahead of the show, let’s know if there are questions you would want answered during the show. Take a listen here and reply, if you’d like your input featured

Connect with the host, Ola Williams:

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Let’s chat!

Episode Transcript

(00:00):
Music.

(00:06):
Are you starting a small business or buying an existing business?
This podcast, Startup Your Small Business and Learn, shares perspectives using
the psychology of retail and financial awareness, all with a reasonable dose of optimism.
The show promises to give startup solopreneurs insightful strategies and practical

(00:29):
solutions that supports the mindset to execute business projects.
Project my name is Ola Williams your host on
the show I encourage you to join me to
learn with positivity and great exchange of
ideas before we look at the warning signs
there's one other thing I would like
us to look at which is can you negotiate with owners of the the payables in

(00:55):
your balance sheet maybe to move it to long term I touched on this I believe
maybe in episode 27 when I was talking about liabilities,
either episode 26 or 27.
So you may want to listen to that.
But the point is you can actually improve your balance sheet by negotiating

(01:17):
with owners of the payables in your balance sheet.
So if the payables, if you have some tangible payables, some big payables that
you need to pay back within one year, you can speak with the owners of those funds,
the money you're supposed to pay back, and see if you can come to an agreement

(01:39):
to pay them back after one year.
That way, your accountants can move that payable to long-term payable.
And that's more, because what that means is your business is not under pressure
to pay that money quickly. quickly, you have some breath, you are so wrong to actually do business.

(02:02):
And pay the money later.

(02:32):
In a community of informed and successful entrepreneurs.
Okay, hopefully those actionable steps that you can take that are practical
for you that you can actually do that can help you in your business.
So having said all that, are there any straightforward warning signs in the

(02:54):
balance sheets that you should be aware of?
You get your balance sheets, are there things that should give you some signs
that, oh, I need to step up a little bit.
I need to do a bit more. This is going into danger.
And I would say, of course, but the important thing is to actually have a balance.
That's the important thing in my years of experience as an accountant, it's to have a balance.

(03:23):
So what do I mean by balance? It's to, you know, I talked about,
the last session I talked about, if you can negotiate some payables going into long-term.
At the same time, as you're doing that, you want to make sure you are able to pay your payables.
So you want to make sure, and the secret to doing that is to ensure that the

(03:46):
assets you have, they are actually able to generate cash.
They are able to generate value for your business because that's what will make
your business continue to exist.
So the ability to actually turn those assets into liquid cash.

(04:07):
And that's when we talk about working capital and all that.
In simple terms, if you've heard of working capital, it's simply how you're
turning your, how you're having cash, you know, your inventory,
how quickly you're turning that into cash.
You're using that cash to buy more inventory and then your payables,

(04:28):
as you're selling, you bought inventory, you sell.
Those inventory that you bought, you need to pay the suppliers.
So the ability, the whole cycle of selling.
Getting the money, buying the supplies, selling it, paying your vendors,
that's working capital.

(04:49):
So the one insight is as you get your balance sheet, look at, oh, how much?
So quickly, you can quickly take your calculator and look at your current assets.
Your current assets are things like your cash in the bank.
There are things that can be converted into cash immediately,
like maybe say within 30 days or 60 days. So your cash in the bank,

(05:11):
your receivables, money that people owe you.
So those are your current assets.
So if you take a calculator, if you remove your current liabilities,
those are money you need to pay vendors within the next 30 to 60 days.
If you remove your current liabilities from your current assets, what do you have?
If you have a negative, that means that's a warning signal. That means you don't

(05:37):
have enough cash that you can convert quickly into cash.
You don't have enough cash to pay what you need to pay within the next 30 to 60 days.
So that means the cash that is coming into your business within two months between
when you're doing the calculation and the next two months is not able to pay

(05:57):
what you owe people within the next same two months.
So that's trouble, right? So what you want to do is to see how you can get in
more cash or how you can reduce your liabilities, efforts to reduce the money you hold.
But you want to make sure that at every point in time, you have more than enough

(06:20):
current assets to pay your current liabilities. So that's one warning sign that can be very helpful.
Music.
Those are the questions I received, and I've tried to answer them to the best of my ability.

(06:45):
If you have more questions or you have comments specifically about how to read
and interpret a balance sheet,
please do share them with me through the channel in the show notes,
and I will attend to them.
I promise, if you would like your voice notes to be featured on the podcast

(07:07):
episode, let me know as well and I will feature it on the podcast episode. Thanks very much.
Thanks for listening. Hopefully, that added value to you.
I do like to say that the show aims to highlight broad business patterns that

(07:27):
are considered the same as ever. However, I also acknowledge that personal circumstances may differ.
So please apply the lessons in line with your context and seek professional
guidance as may be applicable to your business.
Until next episode, please do share the show so value is added to others as well.
And remember, let's continue to learn together and be encouraged to keep on connecting.