Have you been looking into the fortress balance sheet?
In this article, you will learn what a fortress balance sheet is and how to build it in simple words.
So let’s get started.
What is a Fortress Balance Sheet
A fortress balance sheet is, as its name suggests, strong and robust enough to absorb any financial challenge and protect the firm’s financial condition.
In other words, a fortress balance sheet is just a normal sheet with better parameters and strategy that helps to stand up firms against financial challenges.
The word “fortress” was introduced by the CEO of Jp Morgan, Jamie Dimon, after the 2008 financial crisis. He describes it as an unquestionably strong balance sheet that helps in crises which come with no warning, including natural disasters, pandemics, and war.
Overall, this sheet tells us to prepare a strong sheet by keeping lots of liquidity, which not only fights against bad times but also gives an opportunity to invest in those times.
It’s no doubt that in the world, economic problems arise suddenly, and its most recent example is COVID-19. Because of that, many small and large businesses were affected negatively, but if firms have a strong and reliable balance sheet already, the company does not worry about negative effects.
How to Build a Fortress Balance Sheet
Fortress is not actually any type of balance sheet, but it’s a normal balance sheet with a strong base. A fortress balance sheet includes some parameters and techniques to build a strong balance sheet, which is called a fortress balance sheet.
Here are some ways to follow for building a strong balance sheet.
Cash Reserves
Taking a cash reserve is very helpful during unpredictable financial crises. A recent example is COVID-19, where many businesses shut down because they did not have enough cash during COVID to run business expenses.
Focus on Inventory
Carrying more inventory compared to need negatively affects the firm. Inventory management, including storing, shifting, and overall managing extra inventory, will not benefit you but also consumes some cash and advantages expenses.
Account Receivable
Account receivable means you own money from your clients. So look at how much account receivable is left. It has an effect when they miss the payment amount on time, especially when the client has bought a large amount of product or service from you. So also try to take an account receivable on time.
Credit Rating
Credit rating is very helpful for any business. It has the power to run a business during crises. If your company faces any issue regarding finances, then a bank loan is one of the best ways to ask for help.
But for this, you have to have a good credit score. So monitor your credit report and check transactions that are needed.
Quarterly Analysis
Analyzing the balance sheet time to time is a plus point for business and the company. So I suggest you check the sheet quarterly because it provides well-guided details to make a decision for the company.
One of the great benefits is to provide time to tackle financial problems that we will face in the future so we can avoid it or create a solution for that.
Non-Performing Assets
Non-performing assets are assets that do not generate any revenue for the company; sometimes, they consume money for maintaining.
So it is a good idea to sell those types of assets in exchange for cash. It will help make a good structure of company assets by removing unnecessary assets.
Ratios
Ratios are one of the important parts of the financial world. It indicates the financial position of any firm. It not only helps investors to analyze a company but is also used by company professionals to track the company’s position.
One example is the service debt ratio, which is used by banks to clarify whether a firm has the capability to pay back its loan with interest or not. It helps the bank check the risk of providing a loan.
Now next section is it’s importance.
Importance and Benefits of FBS
It’s no doubt that you get many benefits from creating FBS (fortress balance sheet). Yes, it’s not easy to build it, but if you successfully create it, then you get those numerous benefits.
Borrowing Power
When you have a strong financial position, banks and other financial bodies easily trust your company, and you can borrow money from them. Have you ever heard of cash flow loans? They are easily obtained by those who do not have a good credit score, but they come with a very high-interest rate between 23 to 99.
But if your financial position is strong, then you can get a traditional bank loan not only with a low interest rate but also agree with your terms and conditions.
Flexibility
A company that has good flexibility can easily change the structure of company decisions, such as buying and selling assets and taking new opportunities that arise suddenly. And of course, for making flexibility, you have to focus on creating a strong balance sheet.
Attract Investors
It’s simple to understand that investors will look at a safer firm. When they find out a strong fortress balance sheet, firms gain trust, and investors gain confidence to invest in those companies.
Safe Wall
Building a Fortress balance sheet is like building a net on a downhill. If people fall, then the net will catch them, and similarly, a fortress sheet will catch a company against suddenly rising financial crises.
Conclusion
So here was all the information about the fortress balance sheet.
Just follow the above section to build a strong fortress balance sheet that stands against crises.
Also, comment below with your unique thoughts.