Toss Out the Kitchen Sink This Quarter to Clean Up Your Balance Sheet

There are two major reasons this is the quarter you should clean up your balance sheet on all those soft squishy assets and optimistically valued liabilities. First the general economy and uncertainty provide cover. USA Today and other major publications are reporting that a number of companies have been coming forward with pessimistic news that…

There are two major reasons this is the quarter you should clean up your balance sheet on all those soft squishy assets and optimistically valued liabilities.

First the general economy and uncertainty provide cover. USA Today and other major publications are reporting that a number of companies have been coming forward with pessimistic news that their earnings in the fourth quarter or the coming quarters will be a disappointment. Sandy is another sometimes truthful and yet convenient factor to cite.

Secondly, those who move closer to fortress balance sheets more accurately know and can plan for seizing fleeting opportunities when they confidently know resource levels of financing, plant and human capital.

Setting aside generally accepted accounting principles to focus on economic aspects of what balance sheet items to consider assets to partially or wholly reserve or write down and liabilities to increase, consider the three questions and discussion below:

  • Businesses typically capitalize expenses that create an asset with what now may be a questionable recorded value. Consider the convenient issue of two goodwill write offs this year for Hewlett Packard of eight billion dollars for the EDS acquisition followed by another eight plus billion for Autonomy. When the professionals are cleaning house is the time to be truthful about those dated inventory items, questionable receivables and grossly insufficient liability reserves.
  • Most businesses do not know how changes at one of their top 10 customers may affect the bottom line. There will always be a time when your top 10 customers will drop off your A list. Would you rather have Apple or Motorola as primary customer for your cell phone business today? Some people saw the change coming and profit. Others were blindsided and suffered.
  • Many businesses would benefit from looking into an asset that it will be better off selling at a loss to free up cash to pursue a more advancing opportunity. Favorite candidates in this group are those once profitable, but now marginal products, locations and inventory items which sale will generate cold hard cash to be much better deployed in higher yielding area.

The timing is particularly appropriate at this time if your unit has not met bonus milestones, the bonus formula is cash generation oriented, or one time time expense like these items can be excluded from the payout formula.

After all, the correct motives for such an introspective write off of everything except the kitchen sink approach is to lay the foundation for building corporate value and wealth for the shareholder. Unemotionally and properly done, clearing the decks to opportunistically exploit existing or targetable opportunities can do just that.