Business

The 3 Things to Watch on Your Balance Sheet That Are Early Warning Signs of Trouble

Your business wants you to listen to it!

I was a professional stock picker for over 30 years.

I’ve poured through thousands of pages of financials, questioned hundreds of management, and stumbled upon every way an investment thesis can go south. Managing a couple of billion marked to market daily was stressful. New Year’s day was my only true break from the pressure of performance — the old year’s numbers were locked and the clock hadn’t yet started on the new one.

What kept me going were the stories.

All sorts of stories — from horror to romance — are encoded in a company’s financials, which are always whispering to their owners. Here’s what I mean: Pull your balance sheet, which is a snapshot of where you business lives. Now take a look at your inventory, what you’re owed, and what you owe. These, plus cash are your working capital.

Working capital changes are the canary in the coal mine of business.

Compare this balance sheet to the last snapshot you have. Have cash, inventory, receivables and payables gone up or down? By how much compared to sales growth? Compare a seasonal business to the prior year, not quarter.

If your working capital is growing faster than your sales, you’ve got a problem.