Who Really Owns this Business?

 Written by Tony Battaglia, CPA, MBA

On the "right side" of the business Balance Sheet sits the shareholder or owners equity section. Owners' equity is the accountants' estimate of the value of the shareholders investment in the firm. It represents the total contributions and ownership interest of the preferred and common stockholders. Retained Earnings presented with owners equity is the firm's accumulated earnings since inception less dividends and any other adjustments.

The generation of sales and profit does not necessarily ensure adequate cash on hand to meet financial obligations as they become due. Though the company may enjoy a high degree of profitability it may still look to bank financing to support an increase in assets. Financial leverage offers unique advantages to a point. (Financial leverage represents the amount of debt used in the capital structure of the company.) Turning to its local bank to support its growth comes with a price both financially and with control. As debt increases lenders will perceive a greater financial risk and may raise the average interest rate as well as demand greater restrictions through imposed covenants. A small business should monitor and maintain an acceptable debt ratio. The best use of debt is when it is used to generate additional business.

A small business should consider the following sequence of funding for its current and future financing.

1. Maintain a conservative leverage ratio with ample unused borrowing capacity to ensure continuous access to financial markets.
2. Adopt a modest profit payout to owners that will enable the company to finance most of its growth internally.
3. Use cash, marketable securities and unused borrowing capacity as temporary liquidity buffers to provide financing in years when investment needs exceed internal sources.
4. If external financing is necessary, raise debt unless the resulting leverage ratio threatens financial flexibility.
5. As a last resort sell equity or reduce growth after all alternatives have been exhausted.

BIK’s outsourced Controller|CFO Advisors can help assess your company’s financial leverage and address any financing issues.

The BIK Controller|CFO Advisors:

Tony Battaglia
Tim Beck
Al Knox
Larry Schmitt

Together we can perform a variety of accounting and financial services to help your business run more efficiently and economically.  Our objective will be to improve your bottom line through better processes and procedures. Contact us today at cfoservices@bikcpa.com or call 847-281-3209. 

Visit our web-site at www.bikcfoservices.com.