3 reasons the balance sheet is important for spas
1 . LIQUIDITY ASSESSMENT : Current assets versus current liabilities help determine if your business can cover its short-term obligations . Can you pay your bills on time ?
A liquidity ratio measures a company ’ s ability to pay off its short-term debts with its current assets . It helps to assess whether the company has enough resources to cover its short-term obligations without having to sell off long-term assets or secure additional financing . l
Current Ratio : The current ratio is the most common type of liquidity ratio . It is calculated by dividing a company ’ s current assets by its current liabilities .
FORMULA : CURRENT RATIO =
Current Assets Current Liabilities
Example of a spa ’ s current ratio
Imagine a spa business has $ 50,000 in current assets ( cash , inventory and receivables ) and $ 25,000 in current liabilities ( short-term debts and bills ). Using the formula
Current Ratio = $ 50,000 / $ 25,000 = 2
identifies the spa has twice as many current assets as it has current liabilities , indicating it should comfortably be able to cover its short-term obligations . A current ratio of two is generally considered healthy , showing good liquidity .
The balance sheet tells you how financially healthy your spa is .
2 . BUSINESS HEALTH : The balance sheet tells you how financially healthy your spa is . Are you accumulating assets and reducing liabilities over time ? 3 . INVESTOR AND LENDER RELATIONS : If you seek funding or investors , they ’ ll want to see your balance sheet to assess the financial stability and growth potential of your spa .
Using the balance sheet for decision-making l You can see if you have enough cash to invest in new equipment or services . l It helps you assess whether to take on additional debt or pay off existing loans . l It ’ s a tool for evaluating the financial performance of your spa over time . Compare balance sheets from different periods to track progress .
Tips for spa owners l Regularly update and review your balance sheet to stay on top of your financial situation . l Work with a qualified accountant to ensure accurate recording of financial data . l Use the balance sheet along with other financial reports for a comprehensive view of your spa ’ s finances . ( See page 32 for an overview of the four basic financial reports .) n
CITATIONS :
Besley , S ., & Brigham , E . F . ( 2005 ). Essentials of Managerial Finance . Kieso , D . E ., Weygandt , J . J ., & Warfield , T . D . ( 2007 ). Intermediate Accounting ( 12th ed .). Fotopulos , D . ( 2014 ). Accounting for the Numberphobic : A survival guide for small business owners .
IBANESSA SOTO HOGAN is a business and financial strategist for spa and wellness industry companies . She is the founder and owner of Masterpiece Accounting Services and an associate professor of tax and accounting at Monroe College . She holds a Bachelor of Public Accounting and an MBA in Accounting , and is a licensed tax professional / enrolled agent ( EA ) and a certified professional business advisor ( CPBA ).
30 PULSE n SEPTEMBER 2024