After surviving the first 18 to 24 months in business, you move into the growth phase. During this phase of the business cycle, you have become accustomed to the various business models (ie, revenue model, operating model, sales model, etc.) required to run your business effectively. You have made progress in learning how to manage your business from a financial statement analysis perspective. The hectic activity of getting the business off the ground and maintaining momentum in the market has become second nature to you. You are guided to make strategic decisions based on the information provided by the company’s financial statements, especially the balance sheet. To employ effective business management strategies, you must have a fundamental understanding of the 3 most important balance sheet lines: cash, total liabilities, and retained earnings.

Number one: cash

An old saying goes: ‘He who has the most gold makes the rules!’ Sure, we know that when the bank account is constantly low for the business, thoughts start to rise in his mind about possible failure and subsequent bankruptcy. Before going to this extreme, he must proactively study the trend of trading cash on a monthly and weekly basis. This level of supervision helps to minimize the impact of any sudden changes in the market. It is recommended that the company have a minimum cash reserve of 6 months of operating expenses.

Number Two: Total Liabilities

The second most important item on the balance sheet in terms of effective business management is the evolution of Total Liabilities. For business management purposes, the trend in total liabilities is a telltale sign of business profitability and longevity. Often, the profitability of the business is diminished by the heavy reliance on debt to finance operations. If it is used to invest and grow the business strategically through acquisitions, business debt is considered a good thing. The key to managing business debt effectively is to use it wisely for strategic business purposes that ultimately increase and stabilize the company’s operating cash flows.

Number three: retained earnings

In conclusion, you should pay attention to the trend of retained earnings on the balance sheet. Retained earnings is an account line on the balance sheet that measures the profitability of the business over a specified period of time. Investors closely study trends in retained earnings because they represent a business owner’s ability to run the business effectively. Furthermore, it is through retained earnings that the income statement ‘flows’ onto the balance sheet at the close of the accounting year. Even you, as a business owner, can measure the return on your investment by understanding the trend in retained earnings.

If it becomes a habit during the growth phase of the business cycle to effectively manage and grow the business by understanding the 3 balance sheet line items of cash, total liabilities and retained earnings, then you will increase the operating cash flow of the business in the long run. Additionally, they can help guide you in developing and implementing key business strategies that will position the business for increased market share.