Balance Sheet Management: A Tale of Two Agencies

Two collection agencies begin 2009 with the same balance sheet. Throughout the year, they have identical revenues and expenses (see right). They end the year with the same amount of cash in the bank. Yet at that time, one agency is in a stronger financial position than the other. Collection Agency #1 has made some questionable choices in the way it managed its balance sheet throughout the year. It has decreased its payables, increased its receivables, and had more depreciation on its equipment. Owners have also taken what seems to be a small distribution out of the business, but in reality represents half the amount of the company’s profits for the year. These choices have weakened the company’s overall financial condition.

Collection Agency #2 has made different choices throughout the year. It has managed the utilization of its cash resources better, decreasing its receivables and increasing its payables. The company has reinvested back into the business, purchasing a dialer and some other stations for collectors. Its depreciation has fallen, as its equipment has gotten newer and these new investments have not been fully marked down. Still, the company has prepared itself for 2010 better than the other.

Whether an agency has revenues of $200 million, $20 million, or $2 million, financial statements provide agency owners and other stakeholders (such as lenders, management, vendors, and even clients) with the best picture of the current condition of their businesses. While we tend to think of a company’s financial performance in terms of P&L and cash in the bank, another level of analysis is available that lets agency owners position their companies for growth.

Join us at our next Executive Conference Call on Tuesday, October 27, when Kaulkin Ginsberg analysts will discuss “Best Practices for Analyzing the Financial Statements of Collection Agencies. During the hour-long Call, they will describe best practices in the interpretation of financial statements and suggest ways in which these documents can be forecasted based on current business conditions.

Paul Legrady provides management consulting services to creditors and receivables management companies. To confidentially discuss your interests, or to learn more about Kaulkin Ginsberg’s Recovery Review program for credit issuers, contact Paul at 240-499-3818, or by email.