Multi-Unit Franchisee Magazine Issue III, 2012 | Page 74

Finance
By Steve LeFever

The Sponge Technique
Squeeze the balance sheet to improve cash flow

E

veryone knows the value of a
sponge: it absorbs water. This
is a pretty good deal. Well, your
company’s balance sheet is just
like a sponge—except that it soaks up cash
instead of water. This is not necessarily
a good financial deal. As a sponge nears
its capacity to absorb additional water, it
becomes increasingly less efficient. The
same thing occurs with your balance sheet,
a phenomenon that has two basic causes.
Increasing sales—or growth—creates
a need for additional money to finance
an increased level of assets. As we have
noted before, the main source for most
companies is from creditors—in other
words, debt. Risk (in the form of increased
debt) increases accordingly, and increasing
interest expense may even put downward
pressure on profits.
Furthermore, growth in sales is often
accompanied by a decrease in the efficiency
of operation. This inefficiency really surfaces on the balance sheet as proportionally more assets are required to support
new sales levels. In other words, the rate
of asset growth increases faster than sales;
you make the same percentage profit—but
you make it less efficiently.
So what do you do? From my perspective, the clear message in a growth situation is straightforward: manage better. I’ve
listed a few of the ways that can be done:
• Manage current assets (inventory,
A/R) more efficiently
• Restructure debt (long term, not
short term)
• Make more profit
• Sell existing unproductive assets
• Curtail expansion
• Lease fixed assets
• Implement sale-leaseback of existing fixed assets
• Accept more risk (i.e., more debt)
• Don’t grow (use pricing, etc. to limit
growth)
• Get new equity—a passive investor
or active partner.
This list represents the action steps
necessary to manage growth effectively.

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Multi-Unit Franchisee Is s ue III, 2012

You need to arrive at the particular combination of components that will work for
you. Remember, when it comes to the
balance sheet, doing “nothing” is usually
the worst possible decision.
By earning the same level of profits
more efficiently, sufficient cash is “squeezed
out” of the balance sheet to si