Streamlining Balance Sheet: Key to Efficiency and Productiveness

Balance Sheet, which tells us about the financial position of a company, is one of the most significant financial statements for analyzing the solvency and liquidity position of any company. Often it has been noticed that in order to curtail costs of an organization, the main focus is on Income statement or profit and loss account, but in reality, a tight management of balance sheet results in surplus Cash and provides a good investment return to the shareholders. Inefficient balance Sheet management or Asset – Liability management often shows inefficiency and ineffectiveness on part of management. It shows that there is either over or underutilization of capital and unproductive fixed assets in the company which is resulting in tying up of capital in low-value projects. It might further reflect a poor liquidity position of the company and show that it does to have enough funds the meet its short-term liabilities. By managing the following key areas a company can liberate cash and put it in productive ventures.

1. Capital Structure-Capital Structure of a company shows the way finance has been raised in a company. A company can raise money through internal or external sources. A highly levered firm would reflect that the funds have been raised through external sources like loans, debentures, and it also suggests that the company has the capacity to take risks, aims at having a high growth and has more money for growth and expansion. On the other hand, a low-levered firm would the money invested by the shareholders in form of common equity, preferred stock and retained earnings for making investments in various assets and projects. Depending upon the company’s stage of development and nature of business,a right mix of internal and external sources should be there so that a company has a good solvency position and is able to meet its long-term obligations. Capital ratios such as Debt-Equity, Total Debt to Total Capitalization provide an insight into company’s capital position and further help in strengthening the balance sheet,.

2. Capital Deployment and Management-Often it has been seen that although the directors of the company are aware of the money raised but they are unsure of the places where the funds have been deployed which often lead to a decrease in economic profitability of resources. Tracing of capital to each department, unit or division helps the management to make sure that each penny is being utilized to the optimum and also helps in releasing of capital from the units where they have been over-allocated. Further, effective control measures of capital allocation can be implemented in the company to achieve a higher return on investment for the shareholders.

3. Fixed Assets Management– Resources of the company must be invested in those fixed assets, which are profitable and give return to the company in the future years. With the help of capital budgeting, a company can decide whether to make an investment in a particular asset or not.Some of the widely used capital budgeting techniques are Net Present Value, Internal rate of Return, Pay back method which help in evaluation of various long-term assets, and the cash flows that they will generate during their useful life. If a company has assets which are inefficient or on longer in use, steps should be taken to dispose of, so that the surplus cash from those assets can be used for productive purposes and value creation for the company.

4. Working Capital Management– Working Capital Management forms an integral part of a company as it ensures that a firm has enough current assets to meet its current liabilities. If a company has a high working capital it shows that there is an ineffective use of short-term assets, which might be used for some other purpose. And again, too low working capital results in a liquidity crunch and reflects the firm’s inability to pay off its short-term debts.

With the help of financial analysis, a company can maintain the right level of working capital and have good liquidity position. Current ratio, liquidity ratio are some of the tools which help the managers in knowing that the company’s current and liquid assets are used economically and they would have no problem paying their short-term liabilities.

Asset -Liability management has become an integral part of every company as it ensures freeing up of cash and using it productively to have higher returns. Proper management of working capital, right kind of financing mix, liberating cash from unproductive assets help companies in streamlining their balance sheet and redeploy the resources to generate higher returns and maximize shareholders wealth.

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Secrets of Bonding 156: You Know About Financial Statements

Audit, Review, Compilation: You know the difference. With bonding companies, you need certain financial statements (FSs) at specific times. But there is one FS you don’t know about, and it can be very helpful!

Audit: This is the highest level of CPA (Certified Public Accountant) presentation. The CPA provides a cover letter stating they have checked over the numbers and believe they are accurate.

Review: This is the middle level. The CPA does some checking, but less than an audit.

Compilation: This report has a disclaimer letter. It says the FS is the presentation of management – meaning the CPA does not vouch for the numbers.

Other than CPA prepared statements, you could run into one by a Public Accountant, or a bookkeeper.

There are also Internally Prepared statements produced directly by the customer, such as with QuickBooks.

Then there is this Secret One you probably don’t know about. It can be a strategic help and will not be suggested by the accountant. It’s up to you to ask for it! We call it a “Confirmed Internal FS.”

This document is an internal FS, such as QuickBooks, but with an important upgrade. When obtaining a Confirmed Internal Report, the president or company owner is required to sign and date the company Balance Sheet (or maybe every page of the document) and write “Confirmed.” This is an affirmative statement that the FS has been scrutinized. It is a document with greater credibility, because someone is taking responsibility for it. (Read Secret #5 about the role confidence plays in bonding.)

Here is a real life example of how beneficial the Confirmed Internal FS can be. This week we are issuing a P&P bond in excess of $8 million for an applicant with a 12/31 fiscal year-end. Obviously, the CPA report is not available yet. However, before issuing the bond, we must get a read on their financial picture. How did the year turn out?

We can’t get the CPA report yet, but an internal FS is available. Can the underwriter base a decision on this document? That depends on whether the surety has the flexibility to give an approval in the absence of a CPA Audit or Review (Many underwriters are bound by strict rules that tie their hands.)

Fortunately, we were able to proceed based on the confidence that the business owner reviewed and Confirmed the financial statement. He signed his name and went on record, “You can rely on these numbers.” To us, that makes a big difference!

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