Didier Sornette is a person whose work has attracted my interest.  One area of his work that has attracted my interest is identifying fractures in Kevlar. This area of his work has generated ideas on how to identify fractures through FP&A within three elements on the balance sheet.

The first element is accounts receivable

The ability to achieve the objective of converting accounts receivable into cash as fast as possible may be hindered and identifying fractures within accounts receivable may minimize any adverse effects from the inability to achieve this objective. Fractures can be identified by looking at customers from different perspectives. One perspective is to look at customers that are taking longer than usual to pay their invoices or not paying their invoices at all. Another perspective is to look at the types of products or services provided to customers.  Another perspective is to look at customers through characteristics such as geographic location or industry type. Looking at customers from these perspectives can improve the ability to assess liquidity risk.  

The second element is inventory.  

The ability to achieve the objective of converting inventory into sales as fast as possible may be hindered and identifying fractures within inventory may minimize any adverse effects from the inability to achieve this objective. Fractures can be identified by looking at products from different perspectives. One perspective is to look at products that customers are not buying at acceptable rates of time. Another perspective is to look at products sold to customers in specific geographic locations or industries. Another perspective is to look at products created from materials or merchandise purchased from suppliers. Looking at products from these perspectives can improve the ability to assess liquidity risk.

The third element is liabilities.  

This element presents a situation different from accounts receivable and inventory in that activities within companies may present situations creating obligations that must be settled through cash disbursements. Activities that apply to employee relations and product development are examples under consideration.  In regard to employee relations, activities within companies may exist that could lead to litigation such as sexual harassment cases and wrongful termination lawsuits.  In regard to product development, hazardous materials or flawed production processes could lead to defective product lawsuits. These issues illustrate to the potential of unrecorded liabilities within balance sheets.  Looking at the potential of unrecorded liabilities can improve the ability to assess credit risk.

The goal of financial management, maximizing shareholder wealth, can be assessed through a variety of measurements. What this variety of measurements may not assess is potential problems in relationships between businesses and stakeholders. One way to assess potential problems with these relationships is to look for fractures.