Companies in all sectors need to build resilient balance sheets to help them survive the severe shocks that persist in today’s business environment. A resilient balance sheet improves financial indicators, giving companies more breathing room to operate under stressful conditions and withstand the scrutiny of shareholders, creditors, and regulators. It also provides a strong foundation for pursuing market opportunities, such as M&A and share buybacks.

Fortifying a balance sheet is not easy, however. Companies must take a variety of initiatives that run the gamut from improving the management of working capital and cash to defining new strategies for asset management, capital structure, financing, and risk. Capturing the value requires an operating model that enables the finance department’s treasury function to integrate steering and optimization across the company’s financial resources.

Extracting more value from the balance sheet is part of the CFO’s broader evolution to serve as a company’s custodian of performance. With a strong mandate and cutting-edge digital capabilities, the finance/treasury function can also play a pivotal role in strengthening risk management and compliance at the enterprise level.


Today’s Environment Demands a Sturdier Balance Sheet


Recent challenges have brought balance sheet durability to the attention of CEOs and CFOs. Interest rates are at their highest levels in more than a decade, inflation continues to rise, and market volatility persists.  

Although these macroeconomic trends differ by region, all companies need to act aggressively to strengthen their balance sheet. In the US, the inflationary spike largely resulted from demand and supply imbalances relating to, for example, durable goods. To respond, large retailers are optimizing inventory (through discounts, for example) and improving cash forecasting abilities. On the other hand, Europe is experiencing higher prices for energy (up by more than 50% over the past few months) and nondurable goods (including food). This has led companies to improve their supply chain and financing structure, as well as commodity risk management.

The COVID-19 pandemic and geopolitical crises have affected liquidity across industries. For example, a major airline needed a government bailout after experiencing a liquidity squeeze during the pandemic shutdowns, and a leading energy company received a large credit line from the government when it suffered deteriorating liquidity because of the war in Ukraine.

By strengthening its balance sheet, a company gains a variety of benefits that help to fortify it against such challenges. The benefits include:

  • Optimized working capital and liquidity across regions and business lines.
  • Transparency on its aggregated cash position to enable accurate forecasting.
  • The ability to manage its target debt rating and financial KPIs with minimum financial resources
  • Increased capital productivity and performance.
  • An integrated view of financial risk-return tradeoffs across foreign exchange, commodities, interest rates, and credit.
  • A rapid enterprisewide perspective on liquidity status to inform strategic discussions.

In BCG’s experience, strengthening the balance sheet can significantly improve profitability—potentially boosting EBIT by 10% to 20%. The bottom line improvements are driven by, for example, increasing returns on cash and assets, reducing financial losses through better risk management, and increasing the predictability of accounts receivable. A company can also improve its financial structure, including the net debt-to-EBITDA ratio and credit rating. In addition, companies pursuing transformations benefit from lower risks by reducing the overall volatility of key financial indicators. Finally, the efficiency improvements help to strengthen the partnership between finance/treasury teams and business lines.

Content developed by BCG.