Is there cash hidden in your balance sheet?

Reading Time: 4 minutes

Your organisation’s income statement is a good starting point for management teams seeking to improve the profitability posture, reduce debt-to-equity ratios, and increase organisational resilience. Creating long-term value necessitates maintainable growth and adjustments to cost structure and margins. Nevertheless, very few organisations I encounter seriously consider the assets and liabilities on a balance sheet that can unlock valuable opportunities. 

Here are six steps you can take to unlock the cash from your balance sheet:

1. Start with your Receivables and Payables

I see many business leaders in the SME sector view working capital as merely a cost of doing business. Few deeply analyse the negative effects of protracted customer terms and tight payment cycles. A comprehensive analysis of the previous FY’s transactions typically reveals gaps in the process, terms that are unfavourable when it comes to payment cycles, and equally unfavourable when it comes to receipt cycles. Vendors/partners are owed payables in tight cycles. Yet, customers are often sitting in arrears for large sums of monies. All of these compound and produce a poor working capital posture.

I find that the SME organisations I consult typically suffer from financial issues caused by delayed invoicing, poor collections and receivables policies, unnecessarily early payments to vendors and partners, inept payment processes, and unsustainable terms. Addressing these issues can allow the organisation to shorten its cash-conversion cycle, thus freeing up funds for investments, debt reduction, shareholder dividends, and M&A activity.

I recently worked with a client of ours on their receivables and payables processes. We conducted a transaction-level analysis of their last twelve months of receivables and payables data. Through the analysis and a revision of protocol in both receivables processes and payable cycles, we achieved a significant improvement in working capital.

2. Act on underperforming long-term assets

Your asset ledger may also be capable of releasing substantial amounts of cash. Analysing the returns generated by investments in property and equipment, and other long-term assets can identify non-core assets that hinder performance. You can divest or repurpose these assets, which improves results by freeing up cash for higher-value activities.

The CEO and COO of an IT managed services firm wanted to reduce their debt-to-equity ratio and deploy their capital investments for higher returns. We worked as a team with their (external) CFO and leveraged a framework to determine which lines of revenue, assets and business units were performing well and could deliver more, and which were underperforming and needed treatment. 

A deeper analysis of the relative performance of all factions revealed that their return on invested capital was extremely variable. Some of their business units and assets were performing significantly better than others. As a team, we determined where to invest. We ranked the list of underperformers by evaluating the ease with which each business could achieve its return target and how each divestment could ill-impact liquidity.

3. Recuperate cash that is trapped

Dollars on the balance sheet are not all equal. You may have cash tied up in jurisdictions without an operationally-efficient or tax-efficient and compliant way to deploy it. Regularly reviewing the cash requirements, balances, and transfers can help free the trapped cash.

4. Accelerate partnership returns

Companies often partake in partnerships that lead to commercial paybacks. However, these dividends are usually not secured promptly. This situation is the same as trapped cash in so far as the cash belongs to the firm but is not accessible. In February 2022, one of our IT services clients was owed a significant sum of payback from three vendor partners and two distribution partners. A comprehensive review of the paperwork and deep analysis of the transactions yielded that our client was owed about 310K across five partnerships. Conversations and negotiations with all partner firms led to securing the $240,000 immediately, and the remainder of the 70K went into a regular cycle of inbound payments. This cash enabled our client to hire a BDM and get four go-to-market campaigns off the ground. It all started with a comprehensive review of the balance sheet.

5. Manage credit support

Businesses regularly require credit support for a variety of commercial and regulatory reasons. Although these instruments frequently consume valuable liquidity, firms do not pay much attention to them. In tandem with the legal function, a high-performing treasury function can improve a company’s liquidity position by providing insights into credit support across multiple dimensions.

I strongly recommend that you review all credit-support requirements periodically. Ideally, this should be done monthly or quarterly to determine if existing credit support is still necessary. For example, if your business has finished a project that required cash collateral, the cash collateral should be returned. Second, the business should determine the most capital-efficient method for providing the necessary credit support.

6. Reduce operating liabilities

You can release cash through the sale of assets and other methods. Reducing long-term liabilities can generate a pool of cash for investment in high-performing business ventures or distribution to shareholders. You can also improve your liquidity position if credit support in the form of cash or letters of credit exists for a given liability. Companies periodically reviewing their balance sheets can increase their working capital and convert underperforming assets and capital-intensive liabilities into readily available cash. Collectively, these modifications can finance mergers and acquisitions, research and development, and capital expenditures; strengthen resilience; and increase shareholder distributions.

Conclusion

The above are tried-and-tested methods of releasing cash from the balance sheet in the appropriate circumstances. However, companies may find themselves in the same position as before the cash release if they do not sustain these methods. In tandem with the cash-release execution, a robust capability-building programme is crucial for sustaining impact. In addition, this entails enhancing the capabilities of the finance department and the entire business so that the balance sheet is a daily consideration for the entire organisation.

RK is the CEO & Co-Founder of Resonate.

RK is Resonate’s chief strategist, thought leader, and IT industry veteran. Our clients depend on RK to advise on their business strategy, channel strategy, and sales strategy. 

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