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Balance sheets are primarily used to gain understanding and insight into a company’s financial health. Balance Sheet Optimization make these statements of a company’s assets, liabilities and shareholder equity provide a holistic perspective on overall financial position — specifically, what is owned versus what is owed.
MLA provides outsourced CFOs who are experienced in Balance Sheet Optimization and Financial Statement preparation. We also provide Accounting Support from our offices in Dayton Ohio, Cincinnati Ohio, and Virginia Beach, Virginia.
In order to obtain balance sheet optimization, you need to look at your profitability in terms of the funds you’re both lending and borrowing. Have you taken a step back to ascertain whether you are borrowing more than you need? Ask yourself the following, if not:
If you answered ‘no’ to any of the above, it’s time to take action. Here are a few steps to balance sheet optimization that can have a big impact on improving your profitability.
Many small businesses reliably produce a set of financial statements each year, listing assets and liabilities, revenue and expenses, cash flow and shareholder equity. Often, outsourced bookkeeping services prepare these reports, but the documents are quickly forgotten by business leaders as they focus on the day-to-day challenges of running the company — particularly since these documents are rarely required for tax preparation and other small-business reporting.
However, setting this data aside is a grave error that can cripple small businesses. Successful companies keep their financial statements front and center, creating their short and long-term strategic plans with an eye on current and future balance sheet figures.
This view differs from the information offered on income statements significantly, in that an income statement appears as a snapshot in time. It shows revenue that has been earned and expenses that have been paid, but there is no visibility into what is owed. Over-reliance on the income statement can lead to disastrous spending strategies, ultimately crippling cash flow.
For example, after a large sale, revenue figures are robust. However, supplier invoices have not yet been addressed. The resulting impression is that the business is in a strong financial position. What the income statement doesn’t show is the large amount due to suppliers in upcoming weeks. If managers rely on income statements to make large financial decisions, they can find the business is short when bills come due.
Income statements provide a helpful view into transactions that have already occurred, but balance sheets give a clear picture of overall financial standing. This offers an opportunity to identify potential issues early so that business planning is tailored appropriately.
Frequently updating balance sheets keeps a company’s net worth front and center. This figure is critical in assessing the health of a business, both for managers and investors. In addition, over time, a comparison of balance sheet data illustrates the effectiveness of business leaders.
Rethink Payment Terms. First, tackle any payment term issues by negotiating better agreements with your suppliers. If you have a solid payment track record, you should be able to get a better deal with one of your current supplier’s competitors.
Modernize Receivables and Payables: One way to accelerate receivables is to require payment by credit card. Even with interchange fees, you can come out ahead. Down the line, modernizing your receivables and payables will pay off; you will be able to better track these finances, ensure a consistent cash flow, take advantage of savings accrued by removing the paper element and provide better service overall.
Improve Inventory Management: You can also achieve balance sheet optimization through precision inventory management. Sitting on excess inventory comes with a high cost: You’re wasting space and valuable capital that you could be investing somewhere else. Depending on environmental conditions, this inventory could also degrade over time. By employing a “just-in-time supply management” strategy — in which you produce and deliver products just in time for them to be sold — you will cut costs and reduce waste.
Leverage Cash Management Tools: When big dollars are involved and card services aren’t an option, you can tap your bank’s cash management tools that allow you to accelerate payments into your bank account and postpone your outgoing bill payments until the last minute.