For many companies, December 31 marks the fiscal year end. Then the process of preparing the year-end financial statement begins, usually with a detailed inventory count. In the next month or two, the internal accounting team in conjunction with the outside accountants put together a draft year-end financial statement which is then reviewed by senior management. Once approved, the final statement is prepared and forwarded to the various stakeholders including, banks, lending companies, other shareholders and if a public company, the general market.
The general marketplace has never been more unstable: The election of Trump; sky high electricity prices; poor government (all) management; very competitive environment; rising interest rates, etc. Most businesses report that margins have been compressed and there is no room to increase prices.
With that environment, it is critical that the company take steps to do what it can to fix operations including the balance sheet. The year-end statement gives it the opportunity to analyze every aspect of the balance sheet components to make improvements. For example, a review of the accounts receivable may reveal accounts that are taking much longer to pay. The company can then follow up and if necessary reduce availability or take needed write-offs. The same goes for an inventory analysis and review of forthcoming capital expenditures.
Another critical element for review is the company’s borrowings. Typically, there are several components including operating lines of credit, mortgages, equipment loans, leases and depending on the circumstances, subordinated /mezzanine financing.
A review of the Line of Credit should be undertaken to review availability amounts, security and conditions. It may reveal that the company should approach the bank regarding an increase in amounts.
The term loans (mortgages and equipment loans) is another key segment that should be reviewed. In our experience funding from a whole range of sources has been used. For example, if a property is being purchased, a business may take funds from cash on hand, draw on the Operating line of credit and take out a mortgage for the balance of the purchase. It will then use operating funds for move in costs and property upgrades. The issue with this, is that working capital has been depleted and the line of credit has less availability to cover operating needs. Loan amounts and terms should be aligned with type of purchase/acquisition to ensure that financing is right sized for the company.
At Ariem, we have the expertise to evaluate the balance sheet and make suggestions on putting a proper financial structure to ensure the firm has sufficient liquidity to grow. Contact us at www.ariem.ca to arrange a meeting. Our fees are reasonable and we believe that the benefits will more than outweigh our modest costs.