In this piece, business strategist Ryan Williams shares how best to optimise your balance sheet.
With global trade tensions, monetary policy shifts, geopolitical unrest, and an unpredictable AI-powered future, Australian businesses are juggling a lot of economic uncertainty. Many investors are fleeing to hard resources with gold at an all-time high, and many businesses face increasing challenges in unlocking funds to help them weather the storm or grow.
While most entrepreneurs understand that cash is the lifeblood that fuels business growth, and a critical factor determining survival, how cash is put to work is also crucial for a business’s success.
Unlocking cash (or capital) can be done in several ways. Most businesses try to do this by reducing costs and improving profit. But one area that is often overlooked is taking a long, hard look at your Balance Sheet.
A Balance Sheet fundamentally shows what your business owns and owes. By conducting a balance sheet audit (working through it line-by-line and evaluating all assets and liabilities), you can quickly get a handle on opportunities for efficiency, how to maximise revenue-generating assets and what options you have available. It’s a practice that establishes that your business has sound foundations. And while it’s essential for helping businesses prepare for market volatility and turbulence, this sort of review can also support growth and expansion. In simple terms, it’s good practice to regularly optimise your company’s balance sheet to ensure your business is best placed to survive and thrive.
How to audit a balance sheet
Start by examining each line in the ‘Long-term Assets’ section of the balance sheet. Flag the degree to which your long-term assets are generating revenue – not at all/poorly, reasonably, or exceptionally well.
Once you’ve done this, consider:
Retain Assets: How do you improve the performance of long-term assets that aren’t generating good returns? Ask yourself if this is this an asset you can carve out or manage differently to generate a return?
For example, a manufacturer with excess warehouse or floor space could lease it to another business or hire out underutilised machinery during idle periods.
Adelaide-based NDE Solutions is a good example of unlocking value in long-term assets. After taking the time to review its business, the company spun out some of its innovative technology assets into a thriving technology firm, unlocking value as a separate company. The separation has been very successful with the new company recently opening a US office.
Liquidate Assets: If an asset is not generating strong revenues, consider selling it off. Selling off an asset may unlock capital that can be put to better use elsewhere. For example, perhaps it makes sense to sell the factory (and then lease the space back) in order to buy additional equipment and create more productive capacity. Even if the asset is merely disposed of, you would increase your cash balances and perhaps even save money on things like storage or maintenance costs.
Turing to the Current Assets section of the Balance Sheet, consider your Inventory (or Stock) line – businesses selling products should consider how much stock they need to hold as every item sitting on a shelf is effectively trapped cash. It may also be rapidly depreciating in value if it’s perishable or ephemeral, such as obsolescence-prone technology. How much stock does the company actually need to have in order to meet the needs of the customer base?
While you’re reviewing inventory, also look at the cash balances you hold in the bank. Are these cash balances in an account that generates the best interest rates? If not, think about how you might be able to make your existing cash balances work harder in no-risk deposit or money market accounts.
Optimising liabilities
Next, review your current liabilities. For debts and payments due in the next 12 months, there may be an opportunity to negotiate longer payment terms, which helps unlock additional cash for the business that you can put to work in the short term. But remember to always make sure that you can cover your bills in the future – any initiative to work your cash harder should allow for the cash to be released as and when your bills are due.
For longer term liabilities, have a look at any loans or long-term debt the company has. When last did you review the interest rate on your loans? Australian interest rates are currently relatively volatile, and a more favourable rate could generate significant savings, releasing more cash to reinvest elsewhere in your company. Perhaps there’s an opportunity to consolidate loans and negotiate more favourable terms that way?
Driving growth through the balance sheet
Regency Food Services was an example of a company that drove growth by reviewing its balance sheet and making some initially tough decisions. A food supplier to hospitality businesses, the company specialised in servicing restaurants, hotels and other hospitality venues. As part of this operation, the company owned a large fleet of delivery vehicles who would call on stores for deliveries.
However, at some point in time, the leadership realised that trucks and transport were a source of operational headaches and generated very little additional value versus what customers wanted. A hard look at their balance sheet begged the question: does owning and running a fleet really align with the company’s core mission?
Consequently, bold decisions were made to spin out the logistics arm and sell it to drivers themselves, transforming their delivery workforce into a network of entrepreneurial owner-operators. This had dramatic and immediate results. Drivers increased their drops per day from eight or nine to around fifteen – a 66% increase. Service quality soared as drivers took greater care in loading, offloading and handling deliveries. Drivers built stronger relationships with the customers. This change unlocked customer value and increased capacity, ultimately generating more business for Regency Food Services, and driving better earnings for the drivers.
Letting go of the trucks – once considered an indispensable asset – simplified Regency Food Service’s operations, reduced costs to service and maintain vehicles, improved customer service, created greater capacity and led to further growth.
A practical six-step checklist
In summary, by following these six steps, you can start to optimise your balance sheet and gain more transparency and control over your cash flows:
- Analyse cash holdings to see if some of the cash in the bank can be invested into term deposit or money market accounts.
- Review your accounts receivable (outstanding debtors) to see if any are overdue and put a plan in place to collect the outstanding monies as soon as possible.
- Analyse inventory turnover to see if you’re holding the right amount of stock. If you’re a services business, look at staff utilisation.
- Categorise or rank your long-term assets by how productive they are (i.e. how much return they generate or whether they contribute to the longer-term strategy).
- Evaluate if there are any vehicles, equipment or property no longer in use, or not maximised, and consider selling.
- Evaluate whether it would be cheaper to pay a third party to provide the inputs from equipment/property or other assets instead of owning.
By analysing your business from the balance sheet, you can see what’s productive and start redirecting or unlocking the company’s cash to better utilise in areas that generate stronger returns. This will help prepare your company for shifts in the economic cycle, keeping your business afloat and healthy as you strive for sustainable growth.
Your mantra should be – how do I turn ‘Idle’ into ‘Impact’!
