Even today's leading companies could benefit from an always-on transformation capability—the kind that engenders resilience and leads to long-term value creation. BCG knows what it takes to build this muscle.
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.
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. (See Exhibit 1.)
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:
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.
To strengthen the balance sheet, companies need to make improvements across six categories. (See Exhibit 2.)
Finance/treasury functions need an operating model that gives them the mandate and capabilities required to optimize their balance sheets. In BCG’s experience, the target operating model should cover strategy, organization and governance, core processes, controls and procedures, and information and communications technology systems and digital tools. (See Exhibit 3.)
A robust operating model enables the enterprise-level improvement of financial resources, drives efficiency, and lays the foundation for digitizing operations. It helps the function become nimbler and better equipped to address macro trends, such as regulatory changes, sustainability, and market volatility. It also allows the function to help the business units accelerate go-to-market efforts and increase competitiveness—for example, by fully capturing the potential of digital payments to reduce costs, promoting customer engagement, and developing new revenue streams. The improved governance and control system provided by a best-in-class operating model gives regulators greater confidence, decreases criticism, and reduces regulatory findings.
The model’s success is underpinned by digitization. Companies can use big data, analytics, and machine learning to improve transparency and generate insights to enhance the forecasting and management of liquidity and financial risks. They can also use scenario simulations to adapt financial planning to changing circumstances.
To support the operating model, companies need to develop the skills of the function’s staff, with a strong focus on the capabilities needed to implement new technology and digital applications. They also need to redefine the interfaces with adjacent functions (such as risk and technology) and establish a stronger partnership with the business units. Finally, it is essential to improve the corporate culture regarding the use of financial resources and promote the sharing of ideas across organizational units.
To extract value through balance sheet optimization and a new finance/treasury operating model, companies need to take the following measures:
Building a resilient balance sheet is a critical component of the finance/treasury function's growing mandate to create value at the enterprise level. With a strong operating model to support its efforts, the function will have the capabilities, tools, data, and technology it needs to help the company counteract volatility. Although full-scale implementation requires a carefully planned transformation that is rolled out over one to two years, companies can apply specific levers to create economic value in three to six months. By initiating the transformation today, companies can fortify themselves against the inevitable disruptions that lie ahead.