The importance of balance sheet management
There’s more to running a manufacturing business than periodically checking your bank accounts. But some companies still operate that way, with leadership assuming that if there is money in the bank, the company is on solid ground.
“That’s a bad way to look at things,” says Mark Lemke, a business adviser with The Shealy Group. “Some companies have an insane amount of money in the bank but no cash on hand. It seems crazy, but if it takes every dime of cash you have on hand to support your growth, you’re cash poor, and your company is in some trouble.”
That’s why daily balance sheet management is imperative for the present health and future growth of your business. Daily balance sheet management means exactly what it says — checking your company’s financial status every day and having an accurate read, at all times, on your company’s current assets, accounts receivable, outstanding invoices and debt.
“In short, it means managing your cash and managing your cash flow,” Lemke says. “Know the status of your accounts receivable — who owes you money and who you need to follow up with, and revisiting your collection
policy if necessary. If payments aren’t arriving in a timely manner, why not, and how can that be fixed?”
Inventory is another important element of daily balance sheet management. Inventory that sits on the shelf is inventory that is costing you money instead of making it. On the flip side, if your company has an item that is selling particularly well, it might be worth considering whether it’s wise to invest more resources in it.
“You might have too much inventory in one area, but you might not have enough in another,” Lemke says. “Carrying assets comes with a cost, so it’s critical to know how your inventory is affecting your balance sheet.”
The role in growth
Growth takes cash, so if you want to grow your business in the coming months and years, you have to take steps
to ensure that your cash flow is positive and robust, your costs aren’t eating away at your margins and you’re converting your inventory into sales by having the right mix of products on hand. All of it is predicated on having a healthy balance sheet that gives you room to grow.
“You have to invest money in your business in order to grow,” Lemke says. “If you’re going to grow your sales from $1 million to $2 million, you need to have the inventory on hand to do that. You have to have the assets on hand to support sales, which is why careful management of your cash flow is a fundamental part of good growth.”
The type of growth you pursue will also have an impact on how you manage your financials. Aggressive growth takes more funding in the short term than slow, steady growth over a longer period. That has to be factored in to how you sell, save and spend.
“Aggressive growth versus conservative growth will definitely have an impact on how you manage things,” Lemke says. “You need to have your growth strategy well-defined, then take steps to make sure you have the money to accomplish the end goal of that strategy. Whether it’s aggressive, conservative, or moderate growth, it’s all going to impact your balance sheets. You won’t accomplish any of it without proper management of your cash flow.”
What to remember
How can you properly manage your balance sheets? Lemke offers these pointers for those operating in the manufacturing space.
• Software is important. If balancing your books is taking up more and more time, consider graduating from spreadsheets to more sophisticated software that will allow you to track many different categories and formulate sales and expense projections.
• Manage actively. Stay on top of your money situation and be proactive about addressing potential problems, such as cash shortfalls, while they’re still on the horizon.
• It’s always about cash flow. It doesn’t matter whether you’re in manufacturing, agriculture, or any other business; you must have control of your cash flow for your business to survive and grow.
For more information on balance sheet management and how it affects your manufacturing business, contact Mark at email@example.com.