Three main assets on a balance sheet that can threaten a corporation’s survival are accounts receivable, inventory, and marketable securities.

Accounts Receivable, since they are promises of payment at a future date, have an inherent risk of non-payment. It is inevitable to have some write-offs, but the company must replace these lost profits using future sales. For example, a company that earns a normal net profit of 5% will require 20 times the sales to make up a bad debt write-off of $50 (20 X $50 = $1,000). Clearly it is much more cost-effective to manage accounts receivable risk on a single sale than to make up the loss with 20 future sales. Silicon Graphics was one example of a profitable public company whose inability to collect its Accounts Receivable led to its demise.

Inventory write-downs due to obsolescence are common in the high-tech industry. These write-downs are a result of quickly changing demand or technology. To mitigate the risk of inventory obsolescence many companies have passed on this risk to suppliers by adopting “just in time” inventory purchasing. Companies like Lucent and Cisco have been able to stay on top over the years because they continually evolve to meet changing markets. The automobile industry was forced by foreign competition to adopt this method of purchasing.

In an attempt to maximize returns, companies invest surplus cash in marketable securities. However, these investments can be volatile and can even become worthless if the company whose securities they hold becomes insolvent or declares bankruptcy.
However, even when your customer or a company in which you have invested declares bankruptcy you can take advantage of the bankruptcy laws to make the best of a bad situation.

Financial managers have a fiduciary duty to protect company assets by managing risk. If you would like to learn more, Mike Morley will be teaching a class on Risk Management in Mississauga on Nov. 26 and a class on Canadian vs. US. Bankruptcy on Dec 6. For more details go to http://www.mikemorley.com/upcomingseminars.html. To register call Mike at 416-275-1278 or email This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Mike Morley is a Certified Public Accountant who holds the top credit designations in the U.S., Canada, and the U.K. Mike is a recognized authority in the field of finance with more than 25 years experience in both consumer and commercial credit and collections.

Mike is the author of "Sarbanes-Oxley Simplified," which is an easy-to-read explanation of the requirements of the U.S. legislation that makes CEO's & CFO's personally responsible for the accuracy of their company's financial statements.