The Cash on the Balance Sheet

The balance sheet is often overlooked. What I have found in struggling companies is that -- at best -- there was some management focus on the P&L (even this is rarely so). It is certainly so that most people focus on the income statement and the levers that can change this far more so than the balance sheet. Ignoring the balance sheet, or giving it only passing attention, is a mistake that a) disallows opportunities for one time cash generation, and b) contributes to the possibility of future failure.

In virtually every turnaround situation I have encountered, the balance sheet was a source of funds -- and at the beginning of the process, by far the most important source of funds. One can often recover 50% or greater of the purchase price of the company within 6 - 18 months by working on making the balance sheet more efficient.

There are countless opportunities: inventories, receivables, payables, unused assets, life insurance policies, joint ventures or sideline businesses, and others. Each one of these is an avenue to collect cash to pay down acquisition debt, and is also an area for focus to improve ongoing operations.

The process is quite straightforward. Go through the balance sheet line by line, and in this go through the details behind every item. Consider the opportunities:

1) Inventory: how many days of inventory is the company carrying? Using competitive data or even internal plant-by-plant best-in-class benchmarks, where are the outliers?
2) Payables: during bankruptcy, many suppliers demand cash on delivery or cash in advance. Develop strategies to change this, and certainly if possible as a win-win.
3) Idle facilities: they only cost money the longer you keep them.
4) Life insurance policies: this sounded strange to me until we once were able to use these as a funding source to cover a significant percentage of the purchase price of the company.
5) Side businesses: don't be surprised if a company that has found its way into bankruptcy also found ways to invest in businesses that have nothing to do with the core operations.
6) Receivables: ensure that customers are paying on time.

Assign people to each of these. Meet with them regularly. Monitor and track the results and hold them accountable. By showing them it is important to you, it will become important to them.

There was a time that it was hard for me to imagine that a company headed toward insolvency would not have found ways to unlock this cash -- certainly religion is found when survival is at stake, or so I thought. Equally as amazing is that these sources are not found during the period in bankruptcy. Creditors certainly would love to get paid back more of their due. After a time, I stopped being amazed.

Additionally, many of these opportunities can be used for an ongoing efficiency focus. For example, beyond cost structure -- and maybe the most important item to improve the cost structure of an operation -- inventory reduction and efficiency will contribute to the efficiency of the P&L. Additionally, an ongoing emphasis on receivables will help ensure that customer quality is taken into account when planning new sales initiatives.

I have seen the balance sheet overlooked countless times -- before going bankrupt, during bankruptcy, and very often by new management teams after emerging from bankruptcy. I cannot overemphasize the importance of this focus -- for immediately recovering some portion of the purchase price and for the long term financial health of the company, a focus on the balance sheet is as important and in some ways more important than a focus on the P&L.