Saturday, August 8, 2009

The lamest business excuse of 2009 : The Balance Sheet

Some people think that the problem with America is that not enough people and institutions are failing. Lou Holtz, the former football coach turned ESPN analyst, indicated that this shortage of failure might impel him to run for Congress. "There are no winners and losers," he told the Wall Street Journal. "Everybody gets a trophy."

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After Creative Scrapbooking filed for bankruptcy late last year, company President Asha Morgan Moran told Minnesota Public Radio: "Our balance sheet had gotten out of wack. We have a very good business with a bad balance sheet."

When clothing retailer Eddie Bauer filed for bankruptcy in June 2009, President and CEO Neil Fiske proclaimed that "Eddie Bauer is a good company with a great brand and a bad balance sheet."

Of Six Flags, the long-struggling amusement park company, CreditSights analyst Christopher Snow said, "It is a good business with a bad balance sheet; what we have seen is that, surprisingly, they have held up relatively well given what is going on in the economy." The company filed for Chapter 11 in mid-June. EuroMoney magazine dubbed Premier Foods "the classic good business with a bad balance sheet."

But this balance-sheet excuse just doesn't hold water. The Minnesota Public Radio article about Creative Scrapbooking, whose business model revolves around the sale of materials for creative scrapbooking, notes that the employee-owned company spent lots of money buying back stock from employees who quit (to cash out) or who were laid off. And sales had been falling since 2004. Was this a "bad balance sheet"? Or poor human resources management and retailing?

Six Flags was saddled with debt before Daniel Snyder, the wunderkind owner of the Washington Redskins, acquired it. New management's efforts to clean up the parks and attract new sponsors were snuffed out by a high debt load. Six Flags may have been unsalvageable. But Snyder didn't take the necessary steps—injecting more capital, paying down debt more quickly—that would have given the turnaround strategy time to work.

The balance sheet can't be divorced from the underlying business. Any business plan has to take into account the ability of a company to service its debt, just as any household's budget plan has to take into account the ability to stay current on the mortgage. If the enterprise is managed in such a way that it falls behind on payments, perhaps there was something wrong with the way it was managed. Iceland sustained an admirable quality of life through the use of debt that it couldn't service. Is that a case of a good country with a bad balance sheet? Or of a poorly managed economy? Many builders overpaid for lots, borrowed money to build high-end homes with fancy finishes, and then failed when buyers didn't materialize. Are they good builders with bad balance sheets? Or did they misread the market?


Read the full article.