Balance sheet, profit and loss records necessary by Jimmie Wilkins
Solvency
Jimmie Wilkins
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Is your business solvent? About the only way you can really know the answer is if you “manage by the books”, i.e. you have a familiarity with your financial statements... I am a firm believer that 90% of all answers to business viability can be found by examining the Balance Sheet and the Profit and Loss. If you do not have these financial records – get them. If it means bringing in an accountant or taking it to a CPA – make it happen. You need to know the value of your business and subsequently, it’s potential.
I admit it is difficult to determine the value of a small business. As a going concern, it has the value of its profits and the intangibles such as goodwill and market share in addition to the net asset value. To determine if your business is solvent, look at your business from an outside financial perspective. We are not discussing future potential, just a picture of where you are today.
An orderly liquidation of your business might bring the cost value of inventory and less than top resale value of machinery and equipment. In the case of liquidation, most goodwill and other intangibles have less worth but the name and current accounts receivable may be salable. A forced liquidation of your assets will bring only pennies on the dollar, and most small businesses would not be considered solvent if forced into such a sale.
Could you sell the business as a going concern? Here there is value to the goodwill, name and customer base but be careful about overvaluing in this case. If you did sell the business, would the sale price be sufficient to retire all outstanding secured debt? What about unsecured debt? And don’t forget to consider the personal guarantees you and you partners have outstanding. Remember, I am suggesting you look at a worst-case scenario. Only this way can you step outside and “manage by the books”.
The second test of solvency would be a look at the value of tangible assets, including property, machinery, equipment and inventory sold in an orderly fashion over time. Would this type of sale realize enough cash to retire the business debt? If so, you are still in the area of a solvent business.
A good test of solvency will be to draw a balance sheet of sale values of your assets and see what the net worth would be if you conducted a sale of your business. Like I said earlier, few businesses can stand a distressed liquidation so look at this exercise in light of realistic value (neither inflated nor deflated).
This type of exercise should give you a realistic view of the solvency of your business.
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