Clean Up Your Balance Sheet for the New Year
If you are on a December fiscal year-end, then now is a great time to clean up your balance sheet. As you review your assets and liabilities, consider the following:
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.
Sell-off obsolete inventory. Determine where there is excess inventory and work those items down. 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. Balance volume discounts with the costs of carrying additional inventory.
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.
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 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.
Lastly, make sure your depreciation schedule is up to-date and the fixed asset accounting is accurate.
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 potential buyer to determine profitability and the company’s value.
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?
Consider including an annual clean-up your balance sheet accounts in your financial cycle. It will not only keep your business running efficiently, but will also (potentially) free up cash.
If you would like to discuss how you can clean up your balance sheet, please give me a call. I would be happy to help.