Taking Advantage of Balance Sheet Mining
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The document discusses using the balance sheet as a managerial tool to evaluate business performance and risks. It recommends that businesses (1) view the balance sheet as reflecting their investment and manage it accordingly, (2) integrate the balance sheet, income statement, and cash flow statement for a comprehensive financial perspective, and (3) use the balance sheet to assess capital structure, investment performance, capacity for growth, and exposure to uncertainties. The balance sheet provides insights that can improve decision-making, strategy, and long-term value.
Taking Advantage of Balance Sheet Mining
- 1. Rachel Kremer Frazer Frost, LLP June 17, 2010
- 2. Black Swans & Changing Winds Today’s World…. Beauty is in the eyes of “Be-Lender” When there is a crisis, all look to protect capital-valuations and access to capital is not guaranteed Good information and controls are keys to assess and to guard against risks Right size and structure balance sheet for the unknowns Plan early for needs
- 3. Balance Sheet Reflects Your Investment Integrated Financial Perspective Balance Sheet Cash Flow Statement Income statement Your Business is an Investment… …Manage it as an investment: Reflects current capabilities /capacities Understand it and what drives it Measure, monitor and manage – not just for audit but to build value Rebalance as preparation for uncertainty
- 4. The “Key Decision” Questions Do you confirm/evaluate your balance sheet and effectively use audit opportunity? Do you use long term targets to measure performance and track your progress? What is your capacity for growth –is it aligned with strategic objectives, plans and risks? Are you creating and building value to sustain you company?
- 5. • Mining balance sheet provides insights into overall results • Assesses and reports the efficiency and effectiveness of strategies, plans and execution • Improves communication • Builds team understanding • Tracks value creating performance Income Statement Balance Sheet Cash Flow Statement 5 Managerial Perspective- Integrated Financial Reporting
- 6. Integrated Financial Measurement • The balance sheet along with the income statement combine to provide the information to analyze financial performance in terms of: How capital is invested Profitability of investments and return to equity Costs of capital employed – debt and equity Soft spots --- Gaps • This Understanding is especially important for privately held firms
- 7. Capital Performance Cycle • The relationship between invested capital, asset investment, profitability and profit-retention generates the ―capital performance" that links firm's strategies, decisions and execution and determines the company’s sustainable growth : • Profitability -- Net profit margin • Asset Utilization -- Sales-to-asset ratio • Leverage -- Debt-to-equity ratio • Earnings (Capital) retention rate
- 8. Balance Sheet- Liabilities & Equity Mining Opportunities • Debt & Equity– Capital Employed – S/T Debt - Renewal Risk , Interest Rate Risk – L/T Debt - Structure, Proportional Support –WC and cost – Equity- Risk Cushion • How much variability/risk relative to your current working capital needs does your current program have? What do you need to support growth plans? • How do you structure strategic relationships and resources to support revenue opportunities? • How do your risk management/hedging programs impact your equity and capital structure?
- 9. Balance Sheet- Asset Investments Mining Opportunities • Assets – Invested Capital – Cash- Liquidity - Cushion – Net Working Capital – Structure Herd & Inventory Valuations – Fixed Assets/ LT Assets – Investment Strategy, Goodwill ,Fair Value • How do your assets grow relative to sales growth and profitability? • How much cushion do you carry, is it enough relative to your profit cycle, risks? • How do you structure strategic relationships and resources to support revenue opportunities? • Do you use capital return analysis to assess investments/progress ?
- 10. Management Balance Sheet- A Managerial Perspective The management balance sheet presents information more in line with how the business operates: Invested capital: Net assets--Cash, Working Capital Cycle, Fixed & LT Capital Investment Capital Employed: Leverage--ST Debt, LT Debt , Shareholders Equity
- 11. SFD Balance Sheet Trends
- 12. SEB Balance Sheet Trends
- 13. HRL Balance Sheet Trends
- 14. SFD-Returns & Standard Capital Cost Trends
- 15. SEB-Returns & Standard Capital Cost Trends
- 16. HRL-Returns & Standard Capital Cost Trends
- 17. Balance Sheet- Managerial Insights Capital Profile Allocation, Structure Leverage Cost and Returns Capacity to Grow Exposure to Risks What is your capital profile and what should it be? Is capital structure and investments aligned with strategic objectives? Do you trend to see impact of operations over time?
- 18. Lessons Learned- Some Basic Rules Rule 1: Access to capital must be earned Leverage’s cost is more than interest rate Equity and retained earnings have cost but also benefits Prepare and strengthen capital structure Assume availability will not be there when needed
- 19. Lessons Learned- Some Basic Rules Rule 2: The real cost of doing business is higher than you think—profit cycles, risk premiums and higher costs require higher target returns Know your ―real‖ cost of capital, required returns How you invest/finance are keys to long term sustainability Develop strategies that recognize capital’s ―true‖ cost
- 20. Lessons Learned- Some Basic Rules Rule 3: Manage business (Balance Sheet) for uncertainty Benchmark/trend for opportunities and to monitor progress Assess risk gaps: Credit/Commodity, Concentration-Customer/Vendor/Markets Match Funding- Herd Valuation, Liquidity & Returns Financial Leverage Liquidity, cash cushion Balance returns against overall capital cost
- 21. Lessons Learned- Some Basic Rules Rule 4: Growth strategies that are built on leverage magnify risks relative to potential returns Opportunity does not always grow with investment required but risk does Decisions must include impact to your financial capacity, capabilities and condition Remember, without balance sheet, activities do not balance
- 22. Lessons Learned- Some Basic Rules Rule 5: Swine industry requires significant capital for both production and processing - returns > cost over time to sustain business and attract capital is a must Use capital/returns to address LT planning/strategies Change perspectives/conversations to capital/ required returns… … not just cost/profits