Listen to your balance sheet; it knows risk management.
Cash breathes life into a company like blood delivers oxygen to vital organs. Do not run low on cash. The top line in any balance sheet determines the relative health of the company, cash.
Do you have a minimum of four months operating cash on hand? If not, you’re becoming anemic. One month’s cash or less, you’re slipping into a coma.
An extremely healthy operation has cash reserves for depreciation, a plan and funding to replace vital parts.
What are those parts? Real property, like buildings, may be readily replaceable in the current market. Office operations present no serious replacement problems, setting a manufacturing line does.
If you require a specialty building, for example the roof supports an unusual amount of machinery or weight, finding a temporary replacement might prove difficult.
What is the game plan in the event of a catastrophic loss? Do you have target replacement facilities in mind? Are you expanding to a second location to spread risk, or expanding the current facility for convenience or economies of scale?
Or, are you better off funding the potential temporary loss through business interruption insurance? Take a hard look at the function of your real property and find the best solution before a loss becomes a disaster.
The balance sheet will list equipment and machinery. What is the lead time to replace the most critical assets? Do alternatives exist such as outsourcing manufacturing?
Treat your equipment and machinery like a cash flow. Can you maintain that cash flow by changing from asset based to leases? How much time will elapse to regain full operational status? How will you finance this gap?
Look on the liability side of the balance sheet. If the real property is leveraged, is a balloon payment part of the financial structure or is it a fully amortized loan? Can interest rates change over the long run?
The current rates are historically low. If you have a large loan to negotiate several years from now, you might consider an investment in interest futures to smooth the transition and avoid potential loss.
Read and study the balance sheet. You’ll ground yourself in the fundamentals and vital needs of your company.
