A healthy financing structure is essential for continuity and peace of mind in your business. Many business owners focus primarily on sales and profits, but forget to look at their balance sheet. Only when liquidity squeeze or high debt costs occur do they realize that the financing mix was skewed. A good balance sheet structure, with the right ratio of long- and short-funded assets, provides stability and prevents unpleasant surprises. This is where the golden balance sheet rule comes in.
This financial rule of thumb provides a practical benchmark to test the balance sheet ratio. In other words, keep a golden balance between the term of your investments and the term of financing. Applying the golden balance rule helps business owners optimize their financing structure for the long term. Oakhill Financial Services can support this with expertise and tools so that SME entrepreneurs, finance executives and scale-up founders can grow with confidence.
What is the golden balance rule?
The golden balance rule is a classic balance rule in finance that states that the maturity of assets (assets) should be largely equal to the maturity of capital (liabilities). In practice, this means that fixed assets – assets present in the company for more than one year, such as machinery, vehicles or buildings, should be financed with long-term capital, consisting of equity, provisions or long-term debt. Current assets (inventories, accounts receivable, cash), on the other hand, may be financed with short-term debt.
The matching principle behind the golden balance rule ensures that investments should only be repaid when they have paid for themselves. This prevents you from getting into a jam by having to repay short-term loans while the asset purchased (for example, a machine) still needs years to generate returns. This balance sheet rule applies to both multinationals and sole proprietorships and is a useful starting point for assessing whether your financing structure is sound.
How do you calculate the golden balance rule ratio?
The golden balance sheet line ratio is a key number that allows you to quickly test whether your fixed assets are adequately covered by long-term capital.
Formula: Gouden balansregel-ratio = langlopend vermogen / vaste activa
Long-term assets include equity (share capital, retained earnings), provisions and long-term debt (loans with maturity > 1 year). Fixed assets are the long-lived assets that last more than one year (tangible assets such as buildings and machinery, intangible assets such as goodwill, etc.).
Interpretation: a ratio of 1 or higher means that all of your fixed assets are fully funded with long-term capital. A ratio below 1 indicates that some of your fixed assets are financed with short-term capital – a potentially dangerous situation.
Example: Suppose you purchased a €100,000 machine, but financed only €80,000 with a long-term loan and paid the rest of €20,000 from your overdraft. Your ratio is then 0.8. This means that €20,000 of that machine investment must be repaid to the bank within a year, while the asset itself will not yield a return for several years.
What are the consequences of the wrong financing structure?
A financing structure that is not in line with the golden balance rule – or long assets financed with short money can lead to:
- Liquidity problems: cash flows are out of sync with repayment obligations.
- Higher financing costs: short-term credit is often more expensive than long-term money.
- Lower credit rating: banks see a mismatch between assets and liabilities as risky.
- Solvency risk: pressure on working capital and equity position in case of setbacks.
How do you apply the golden balance rule within your business?
- Analyze your balance sheet: identify fixed assets and current funding sources.
- Calculate the ratio periodically: measure whether your fixed assets are fully covered.
- Use scenarios: think ahead when making new investments and choose appropriate maturities.
- Refinance where necessary: convert short-term financing to long-term loans or leases.
- Work with a financial dashboard: this gives you real-time insight into your balance sheet structure.
How Oakhill Financial Services helps you do this
Oakhill Financial Services supports companies in analyzing and optimizing their financing structure. Our cfo services help with refinancing, monthly analysis of balance sheet ratios and strategic advice. We also offer an advanced financial dashboard that links to your accounting and provides instant insight into balance sheet ratios, including the golden balance sheet line ratio. This is how you keep a grip on your financial foundation.
The power of the golden balance rule
The golden balance sheet rule provides a simple but powerful benchmark to monitor your balance sheet health. By financing fixed assets with long-term capital, you avoid liquidity pressure and demonstrate creditworthiness. Want to know how your company is doing? Schedule a no-obligation consultation via our contact page and find out how we can strengthen your balance sheet.
Frequently asked questions about the Golden Balance Rule
What is the golden balance rule?
The golden balance rule is a financial rule of thumb that states that long-term assets (such as buildings, machinery or investments with long maturities) should be financed with equity and/or long-term debt. This ensures financial stability and prevents liquidity problems.
What is the golden rule of balance?
The golden balance rule is another name for the golden balance rule. The core principle remains the same: the term of financing must match the term of the investment. So: finance fixed assets with long capital and current assets with short capital.
How do I calculate the golden balance rule?
The rule is often expressed as a ratio:
(Equity + Long-term Liabilities) / Fixed Assets ≥ 1
If this ratio is 1 or higher, it means that fixed assets are fully financed with long-term capital, which is considered financially sound.
What is the golden rule of funding?
The golden financing rule is a synonym for the golden balance sheet rule. Both terms refer to the same principle: make sure the financing matches the investment in duration. This avoids putting pressure on your liquidity by financing a long-term investment with short-term debt, for example.
