In this series of Measuring Franchise Business Performance, we have established the importance of the Cash Flow and Income Statement. For this post, I will talk about, in my opinion, one of the more intimidating financial reports – the Balance Sheet. It’s a snapshot of a company’s financial position at a specific time. It shows the business’s assets, liabilities, and equity. It can provide critical information to help you make informed decisions about your business. Think of the balance sheet in terms of every dollar spent or invested should be balanced by a dollar in assets. Hence the term balance sheet, liabilities/shareholder equity, should always equal your assets.
Here are some reasons why a balance sheet is essential for your franchise business:
1. Helps you understand your financial position
Provides a clear picture of your company’s financial position. Shows the total value of your assets, including cash, accounts receivable, inventory, and property. It also shows your liabilities, including accounts payable, loans, and other debts. The difference between your assets and liabilities is your equity, which represents the value of your business.
2. Facilitates borrowing and financing
If you need to borrow money or secure financing for your business, it is essential. Lenders and investors will want to see your balance sheet to assess your business’s financial health and determine whether you’re a good candidate for a loan or investment.
3. Helps you identify areas for improvement
It can also help you identify areas for improvement in your business. For example, suppose your liabilities are higher than your assets. In that case, you may need to find ways to reduce your debt or increase your revenue. By understanding your financial position, you can make strategic decisions about improving your business’s financial health.
4. Provides transparency to stakeholders
It provides transparency to your stakeholders, including those who do franchise investing and consulting, lenders, and shareholders. By sharing your balance sheet, you can show that you’re committed to financial accountability and provide evidence of your business’s financial stability. This can help build trust and credibility with your stakeholders and increase the likelihood of future investment or financing.
5. Selling Your Franchise Business
If and when it comes time to sell your business, the broker and or purchaser will ask for your annual financial reports. The balance sheet will help others understand the assets being purchased, liabilities being assumed/purchased and the equity in the business.
To maintain this report, it is crucial to input data accurately and ensure proper allocation. I’m not an accountant and have relied on a bookkeeper to maintain my balance sheet and would ask my accountant to run this report for me quarterly and annually for review. The goal of this post is to highlight the importance of this document, especially when it comes to showing a lender, investor, shareholder, or purchaser the health or position of your business. For the next post, I will focus on key metrics in the balance sheet I would focus on.
Here are helpful links for the Managing Franchise Performance series:
