Cycles of boom–bust–boom have historically followed repeated patterns, and during difficult economic periods it is vitally important for organisations to quickly identify key financial areas of focus to ensure not only their survival but to provide the platform from which to thrive when economic conditions improve.
During periods of economic slow down in particular, every financial decision must be value-adding and all waste, which means anything that is not value-adding, should be eliminated or at least minimised. Detailed financial analysis can identify the key areas to enable you to unlock hidden value – let your balance sheet lead the way.
Many organisations immediately slash discretionary expenditure like advertising, promotion, training etc. during difficult economic conditions. But budget cuts in financial training may not be beneficial because this is precisely how essential skills and expertise can be acquired to ensure that an organisation survives financially and is fully equipped to prepare for its future growth. Such skills include the ability to sift through ‘big data’ and join the dots between relevant information, strategy and value-added decision-making.
A balance sheet shows the total capital of the business and also the total investment that has been financed by that capital, and may be represented as:
Total Capital = Total Investment
Total Capital comprises funds contributed by shareholders plus retained profit (equity), plus long-term borrowings (debt) from banks and other financial institutions.
Total Investment comprises long-term assets, plus working capital. Each element within these key financial areas may be analysed to identify whether or not they are value-adding and determine the ways in which improvements may be made to provide cost savings and cash benefits. Such analysis requires a fundamental knowledge of the three key financial statements, particularly the balance sheet.
A detailed review of Total Capital can reveal whether costs of loans are higher than they need be, and how some loans may be unnecessary or under-utilised particularly when new projects have been deferred or put on hold during an economic downturn. Alternatives and new types of financing may be considered, and ways in which the cost of debt and equity capital may be reduced. The benefits of this are not just reduced cost but also an increase in the future values of cash flows in real terms.
A detailed review of Total Investment and its various elements within long-term assets and working capital provides so many potential ways to improve cash flow and reduce costs, and to structure the business to be able to capitalise on opportunities upon a return to ‘normal’ economic conditions. For example, a ‘real options’ review of current and potential projects, acquisitions and joint ventures may indicate beneficial changes to financial plans and investment strategy. Optimisation of working capital requires the analysis and benchmarking of inventories, receivables, and payables performance to increase cash flow and reduce operating costs.
Every item within the balance sheet is exposed to financial and other risks. A good understanding of risk is essential to appreciate the ways in which it may be avoided and mitigated.
Global world-class training providers Glomacs (based in the UAE) and Oxford Management (based in the UK) provide public and in-house training courses for financial and non-financial personnel at every level. Courses that are referenced throughout this article and noted below will enable organisations to acquire the essential financial know-how and expertise to control costs, unlock value and fully exploit the opportunities hidden in their balance sheets.