Balance Sheet, which tells us about the financial position
of a company, is one of the most significant financial statements for
analyzing the solvency and liquidity position of any company. Often it
has been noticed that in order to curtail costs of an organization, the
main focus is on Income statement or profit and loss account, but in
reality, a tight management of balance sheet results in surplus Cash and
provides a good investment return to the shareholders. Inefficient
balance Sheet management or Asset - Liability management often shows
inefficiency and ineffectiveness on part of management. It shows that
there is either over or underutilization of capital and unproductive
fixed assets in the company which is resulting in tying up of capital in
low-value projects. It might further reflect a poor liquidity position
of the company and show that it does to have enough funds the meet its
short-term liabilities. By managing the following key areas a company
can liberate cash and put it in productive ventures.
1. Capital Structure-Capital
Structure of a company shows the way finance has been raised in a
company. A company can raise money through internal or external sources.
A highly levered firm would reflect that the funds have been raised
through external sources like loans, debentures, and it also suggests
that the company has the capacity to take risks, aims at having a high
growth and has more money for growth and expansion. On the other hand, a
low-levered firm would the money invested by the shareholders in form
of common equity, preferred stock and retained earnings for making
investments in various assets and projects. Depending upon the company's
stage of development and nature of business,a right mix of internal and
external sources should be there so that a company has a good solvency
position and is able to meet its long-term obligations. Capital ratios
such as Debt-Equity, Total Debt to Total Capitalization provide an
insight into company's capital position and further help in
strengthening the balance sheet,.
2. Capital Deployment and Management-Often
it has been seen that although the directors of the company are aware
of the money raised but they are unsure of the places where the funds
have been deployed which often lead to a decrease in economic
profitability of resources. Tracing of capital to each department, unit
or division helps the management to make sure that each penny is being
utilized to the optimum and also helps in releasing of capital from the
units where they have been over-allocated. Further, effective control
measures of capital allocation can be implemented in the company to
achieve a higher return on investment for the shareholders.
3. Fixed Assets Management-
Resources of the company must be invested in those fixed assets, which
are profitable and give return to the company in the future years. With
the help of capital budgeting, a company can decide whether to make an
investment in a particular asset or not.Some of the widely used capital
budgeting techniques are Net Present Value, Internal rate of Return, Pay
back method which help in evaluation of various long-term assets, and
the cash flows that they will generate during their useful life. If a
company has assets which are inefficient or on longer in use, steps
should be taken to dispose of, so that the surplus cash from those
assets can be used for productive purposes and value creation for the
company.