Our recent rainfall has given me my first exposure to flood warnings in Napa. I can honestly say I have never lived in a place where you were invited to go build your own sandbags by city officials. Once I got over my initial confusion about where in the world to put sandbags (do they go by the front door, outside my garage, near the windows?), I had a rather frightening read of the streets that would be impacted in the event of a flood (I think I am in the Phase 4 flood zone), and then I started to think about a business equivalent.
Wouldn’t it be great if there were some contrivance we could draw on to shore up our businesses in the face of an impending disaster? Who wouldn’t like some extra insulation to separate us from the murky waters of doubt that lap against our doors? We know to cover our windows with tape in the event of a hurricane – but what action do we take in the event of a reverse hockey stick on our revenue graph?
The answer can be found on your financial statements. The evidence of your financial preparedness is right there in plain sight.
It’s in the equity section of your balance sheet. Look at your retained earnings account. Smart businesses focus on growing their retained earnings over time. These accumulated (and undistributed) earnings represent emergency provisions that can sustain a business over the long haul. Bankers look at retained earnings for evidence that owners are willing to reinvest in their business before they will extend credit.
Of course, your retained earnings may not be entirely liquid (and by “liquid” I mean accessible as cash, not drinkable). Your earnings might be “retained” in the form of inventory, receivables from customers, or fixed assets, rather than cash, but they can eventually be converted to cash in the event of an emergency. So when you’re looking for comfort, look at your retained earnings. And if your balance is zero or below, you know where to focus once the storm has passed. A financial statement is a lot lighter than a sandbag.