When it comes to the Equity section of their balance sheet, many business owners have a difficult time understanding what these numbers represent, and how a few easy-to-calculate ratios can help them grow their business.

This is a big mistake because they may underestimate the power of properly leveraging their balance sheet. Leverage in finance is the ability to use something to its maximum advantage. 

The consequence is you may end up missing opportunities to massively scale your company, which will greatly improve your valuation when the time comes to sell your company.

Instead, you should learn how to properly use leverage to make strategic investments in the health of your business. Also, the equity section of your balance sheet can give you valuable insight into the current value (net worth) of your company, and provide early warning signs of trouble ahead. 

Mastering these ratios is equivalent to the way a wrestler uses leverage to pin an opponent. Leverage is a power move, using finesse (lever) to your advantage.  

There are industry standards for proper balance sheet leverage. Leverage is best understood by dividing your Total Liabilities by your Net Worth.  

Generally, a lower ratio is better. For some industries, 3:1 is adequate. 10:1 is typically very high ($10 of debt for every dollar of equity). If your banker tells you you are over leveraged, remind him that a bank operates at a 10:1 ratio and has access to the Federal Reserve. However, say it with a smile :) 

So, the next time you are struggling to understand the equity section of your balance sheet, make sure you check out my Financial Leverage Framework. It provides the easy-to-calculate ratios and how you can use them to your advantage.  

I have developed a program to help business owners gain Financial Mastery in their business and would be happy to share the whole system with you when you are ready to take action.

Regards,

Patrick