6 Ways around Balance Sheet to Spot Problems in Startup

A good friend once asked me: “What do you look at to quickly spot problems in a startup?”

I told him: "Balance sheet"

Balance sheets don’t get the same love as the P&L. They're harder to prepare and even harder to interpret, but they carry all the karma of your past decisions.


1. Rule Number One - Watch Out for The Extremes: Swings and Statics

Swings signal instability. My rule of thumb is movements over 10% from the previous balance (or even the smaller ones if they’re significant) needs explaining. On the other hand, static balances can be just as problematic—why are they dead like that? Both extremes deserve a closer look.


2. Cash - Is It Enough and Does It Make Sense?

You need to stalk your cash balance. First, do you have enough to cover the next 12 months with the working capital requirement? Second, can you explain where it’s going? And finally, have there been wild swings? – they usually point to inconsistent cash flow management.


3. Accounts Receivable - Are You Collecting?

A big fat receivables balance usually isn’t good; it often means poor collection or weak credit analysis. Is it in line with revenue trends? Did it suddenly spike? Is it heavy with only a few customers? Accounts receivable is always where the party is. Make sure you check out every corner of it.


4. Accounts Payable - Low isn't Always Safe, High isn't Always Risky

AP is tricky. Compare it to your monthly expenses. Very low AP might mean the business is tying up too much cash in expenses, draining working capital. Is the company negotiating favorable terms with vendors? But, not all payments can be delayed. Look again – high AP could signal trouble paying suppliers. Business interruptions and operational disruptions will pose a serious risk.


5. Inventory - Do You Know Where Your Goods Are?

Inventory is similar to accounts receivable: we want it lean. But, there’s an added complication—it has a body. Both the physical goods and their records need to be organized. When was the last time someone checked it in its entirety? Is there a proper receiving and costing process?


6. Accrued Expenses/Revenue - Don't Overlook Them, Look For Them

This is a bit technical, but sometimes revenue and expenses aren't booked even though it feels like they have already happened. If this balance sheet doesn’t have any accrual, there could be some half-baked revenues and expenses missing somewhere. Not great for both presentation and analysis purposes.

Whether you're scaling up or just getting started, the balance sheet is the window into your company’s financial story. Start paying attention to it today before it’s too late.

I'll be sharing more about CFO insights—drop a comment if you agree or disagree, I’d love to hear your views.