The balance sheet is more than a static report. Yes, it shows your company’s financial condition by pinning its assets against its liabilities, but it can do so much more than that. It can serve as a diagnostic tool for managers and other stakeholders. This allows them to analyze historical performance and plan for future growth. Context, judgment, and forward-looking analysis are all key components in using your balance sheet as a strategic planning tool and taking it to the next level.
Look Beyond What’s Reported
Under U.S. Generally Accepted Accounting Principles (GAAP), not everything that creates value or risk for a business appears on the balance sheet. For example, internally generated intangible assets (such as brands, proprietary processes, or customer relationships) are often critical to business operations. But they’re generally excluded on a GAAP-basis balance sheet unless acquired from third parties.
Likewise, accounting for potential obligations — such as pending litigation, governmental investigations, and other contingent losses — depends on the circumstances. These “contingencies” may be reported on the balance sheet as an accrued liability, disclosed in the footnotes, or omitted from the financial statements, depending on how they’re classified under GAAP. Accounting Standards Codification (ASC) Topic 450, Contingencies, requires companies to classify contingent losses as “probable” (likely to occur), “remote” (chances that a loss will occur are slight), or “reasonably possible” (falling somewhere between remote and probable). These determinations rely heavily on professional judgment.
Identify What Matters Most
Once you understand the limitations of reported numbers, the next step is determining which balance sheet items matter most to your business model. A “common-sized” balance sheet — where each line item is expressed as a percentage of total assets — can help highlight concentrations and priorities.
Items with the largest percentages often warrant the most attention, both from an operational and risk perspective. For example, inventory may dominate a retailer’s balance sheet, while accounts receivable may be more critical for professional services firms.
Use Ratios To Assess Strength
Ratios compare line items on your company’s financial statements. They may be grouped into four categories: 1) profitability, 2) liquidity, 3) asset management, and 4) leverage. While profitability ratios focus on the income statement, the others compare items on the balance sheet. Common examples include:
- The current ratio (current assets ÷ current liabilities), a short-term liquidity measure that helps assess whether your company has enough current assets to meet current obligations
- The days-in-receivables ratio (accounts receivable ÷ annual sales × 365), which measures collection efficiency
- The debt-to-equity ratio (interest-bearing debt ÷ equity), which reflects the use of debt vs. equity to finance growth
Tracking these ratios over time — and against industry benchmarks — can reveal emerging issues before they become problems.
Set Goals & Forecast The Impact
After identifying key metrics, establish realistic targets based on your strategy and risk tolerance. For instance, you may aim to increase cash reserves, improve liquidity, or reduce your debt-to-equity ratio.
Importantly, forecast how these changes will flow through the financial statements. Strengthening one area often constrains another — for example, building up cash reserves may limit debt reduction. Forecasting helps test whether goals are achievable and highlights trade-offs early in the process.
A Clearer, Stronger Financial Picture
Reinforcing your balance sheet isn’t just about increasing assets or reducing liabilities. It’s about understanding what’s missing, evaluating risk with informed judgment, and proactively managing key drivers. With thoughtful analysis and planning, you can use your balance sheet as a strategic planning tool for resilience. Contact us to learn more.
