Spring Cleaning: Time to Tidy-Up Your Balance Sheet

by Kelly Deis, Soundpoint Consulting

Spring is the time many homeowners purge their closets and garages. It is also a great time to take stock of your balance sheet. Similar to a cluttered closet, unused or unnecessary assets and liabilities can go unattended amidst the other, more frequently used balance sheet accounts.

Inventory
Take stock of your inventory. Calculate your turnover rate and compare it to industry standards. If inventory turns are lower than the average of your peer group, then you are operating less efficiently than your competitors. What would it take for your company to operate in the top quartile for your industry?

Sell-off obsolete inventory. Determine where there is excess inventory and work those items down as well. In addition to improving your operating efficiency, liquidating unused or excess inventory has the added benefit of increasing cash-on-hand.

Be strategic in your buying decisions. Be sure to balance volume discounts with the costs of carrying additional inventory.

Make a goal to increase your inventory turns and include the metric in your monthly management reporting.

And lastly, make sure your inventory management system is adequate. Hopefully a physical inventory merely confirms the quantities reported to be on-hand. 

Fixed Assets
Identify assets which are not required for running the business. Calculate your fixed asset turnover rate and compare it to others in your industry peer group.

Non-operating (or non-contributing) assets, such as excess warehouse space, an underutilized company car or extraneous equipment make the business appear less efficient than it really is.

You are much better off selling these non-contributing assets and turning them into cash. And, if the asset is really for the owner’s use and enjoyment, then it belongs on his/her personal balance sheet.

Again, set an aggressive goal and track your asset turnover rate in your monthly management reporting.

Make sure your depreciation schedule is up to-date and the fixed asset accounting is accurate. Be sure that a third party can easily reconcile your tax statements to your operating P&L.

Facilities and Leases
Is the present location suitable for your business long-term? If so, have you made the necessary investments to keep it up-to-date and in good condition? If you are planning on growing the business, is there room for expansion?

If you own your property, now might be a good time to refinance while rates are still low. Likewise, if you have a standard lease and plan to stay in the space, consider negotiating lower rent for a longer lease term.

And lastly, if you rent from a related party, be sure your rent is at market rates. This is important as market rent will be used by a valuator or potential buyer to determine profitability and valuation of the company.

Accruals
Accrual accounting should be reviewed annually to ensure that the appropriate liability is being set aside to offset the related expense when it occurs. For accounts such as warranty expense and bad debt, compare the historical expense as a percentage of sales, to the accrual amount to be sure they approximate one another.

Other accrual accounts should also be reviewed to ensure there are no ticking time bombs. For example, can your company easily absorb the vacation or paid-time-off expense if employee(s) were to leave? Are your vacation policies reflective of prudent expense management, or do you need to consider a “use it or lose it” stance?

Consider including an annual spring cleaning of your balance sheet accounts in your financial cycle. It will not only keep your business running efficiently, but will also (potentially) free up cash. And, if you think you might want to sell your company in the next three to five years, a good clean balance sheet will only enhance your company’s value.

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