Fictitious Assets Hiding In Your Balance Statement
In normal times – may we see them again soon and in our time – our accountants allow us to keep “diluted” assets on the books for substantial periods of time before they require write downs. Many companies are not really worth what their balance statements suggest. In franchise companies this is frequently a problem. Maybe not so much now that they have more professional management, but in the companies controlled by their original owners a lot of bending over backwards to help troubled franchisees erodes the company’s financial statement. Franchise in arrears are/were often allowed to sign notes for the past due obligations. The notes were carried on the balance statement as assets and the current accounts were no longer considered past due. As time goes by the errant franchisees fail to pay off the notes. In one company of my experience, the eventual reckoning with the company accountants almost sank the company. Managers resist writing them down/off during good times because they want to look as good as they can each year for purposes of bonuses, stock options et cetera.
When you fail to write down doubtful assets in good times, you set yourself up for the leaner conditions in which accountants want dubious assets written down more aggressively. In today’s environment, that can bring on violations of loan covenants, acceleration of debt balances, renegotiated higher credit costs to prevent accelerations and much worse. Writing down assets is taken out of current earnings, and today that more frequently means losses are incurred and loan covenants are again endangered.
If you still have old obligations from those with whom you do business, and your accountants have not been aging them aggressively and requiring write downs, you should expect them to make you do it all at once and very soon. Everyone should be scouring the books for everything of doubtful value and taking their lumps ASAP while they still can.
If you do it, you can renegotiate what needs to be renegotiated without giving your creditors the extra leverage of your having been forced to do what you should have done voluntarily. Initiatives are valuable. Take them when you can. When (not if, but when) your in house financial person first urges you to face this music, now is not the time to resist. It will be much more painful to do it later this year, and if you do it now you avoid being forced to do it later.
