cash flow
Accounting & TaxesGeneral Business

Does your Balance Sheet reveal cash issues? 

In our recent article, we asked if you were stressed by cash flow and proposed a methodical approach to correcting cash flow issues in your business. We also promised to take a deeper dive into some of the areas you can address to start to close the cash gap in your business. Now, we take a look at the Balance Sheet issues related to cash and what you can do about them.

The Balance Sheet balancing act

The Balance sheet speaks to your cash resources, though ultimately it also tells the tale of your cash flow. If the inflows are greater than the outflows, you will by definition accumulate cash.

Balance sheet issues are the hardest of the cash challenges to overcome. It’s not easy to borrow money or raise equity capital. Sure, you could defer spending but for how long is that sustainable? Is that going to undermine your strategy? And just how do you reduce spending such that cash accumulates again?

Defer spending

Quite clearly, if you are struggling for cash resources, deferring spending of all types is a way to preserve the cash you do have. We have already written about deferring expenses. Here we broaden this tactic to include spending on items that don’t appear in the P&L, for example, the acquisition of an asset.

Now, that sounds really simple and it is. The thing I implore you to consider is what impact does that have on your strategy? Does it slow your growth to a standstill? 

This is a tactic that might work if you are accumulating cash as a result of trading profitably and simply have to wait a bit longer to build up the right amount of cash in the business. 

Reduce spending

You could cut spending in a permanent way. Once again, we are not referring only to expenses that appear on the P&L but to the broader definition of spending. 

Can you achieve what you want to achieve without spending so much cash? Are there cheaper alternatives? Are there substitutes? 

Could you partner up with a person or business that already has what you want? A really good example of this is a take-home meal business using the professional kitchen of a local café, during the hours the café is closed, so that they don’t need to acquire all of the same equipment themselves. 

A variation on reducing spending to accumulate cash is to liquidate fixed assets – effectively reversing a previous decision to spend and exchanging that asset for cash. This is a perfectly good approach to the issue if you happen to have under-utilised or totally redundant assets.

Raise debt-capital

Debt capital comes in many forms. Bank loans, asset finance, inventory finance to name a few.

Debt is a temporary solution. It ultimately needs to be repaid. So, that means it will get you through a temporary need for cash. Debt therefore provides a suitable solution for a business that expects to generate sufficient net cash flows to service and ultimately repay that debt, in a timeframe that permissible under the agreement.

Many times, a business will look to finance the purchase of assets because it helps them to match the cash outflows (interest and repayments) against the cash inflows from that acquisition. In doing so, they preserve their own cash resources, which can be used elsewhere or to provide a cash buffer.

If you hated the idea of liquidating fixed assets, you could think about refinancing them or using them as collateral to secure the debt funding you need. 

Raise equity capital

Raising equity capital is the right move when the business is under-capitalised. In other words, it simply doesn’t have enough cash to operate, at least in the way it intends to operate and the strategy dictates that cash be retained, rather than repaid. 

If you are chronically short of cash, it could well be that you have always been under-capitalised or you are growing too fast for the cash resources you have available. How many of us have tried to run something ‘on the smell of an oily rag’? Too many SMEs raise enough cash to get going, but not to keep going. If you know exactly how you would spend another million dollars if someone gave it to you, this could be you.

Equity is a long-term solution, so it fits a long-term ‘problem’ like that. It is generally more ‘expensive’ than debt because investors require a greater return on equity to compensate them for the risk they take. It’s also harder to come by and you need to be mindful of the capital-raising rules.

Still, if it’s the right fix, you shouldn’t be afraid of it. Yes, you will be diluted in the ownership pool (though the value of your share will remain the same if transacting at market value), but the idea is to grow the pie! Extra capital, if applied prudently, should facilitate that. 

If you need to discuss effective cash management or you would like to better understand the trinity that is your P&L, balance sheet and cash flow, then reach out to the BridgePoint Group team and see how we can help you.

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Neil Parker

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