Posts Tagged ‘80/20 rule’

80/20 Targeting

If you find yourself getting off track in trying to stay focused on a major project, then 80/20 targeting is a technique that likely can help you. Read the rest of this entry »

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80/20 Accounting

The 80/20 rule (Pareto Principle) is one of the most useful we will ever encounter. Let’s discuss its use with 80/20 accounting. This is about focusing on the 20% of customers, products, expenses, etc. that account for most of our company’s results. Read the rest of this entry »

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Determine What Really Matters

Are you so wrapped up in busywork that it’s hard to determine what really matters? There are of course several things you can do to help minimize the distraction of busywork as well as things like interruptions. Perhaps the most powerful one I have used personally is Read the rest of this entry »

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Consider a Variety of Business Information

Do you consider a variety of business information when making decisions, or are you stuck in the habit of only looking at a few things you think are important? Read the rest of this entry »

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Be Willing to Start Again

How often do we just throw up our hands and surrender, feeling defeated. Does this mean we’re done trying? Maybe all that is needed is a brief break. We must be willing to use past failure to build on to eventually succeed. To do that, we must be willing to start again. Just like Read the rest of this entry »

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Excessive Inventory Can Be a Burden

This continues a series of posts focusing on how to manage cash and how managing assets, expenses, and liabilities impact it. Along with accounts receivable which I discussed in Read the rest of this entry »

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Inventory Management Shortcut

Inventory can be one of the most difficult assets to manage. It doesn’t have to be this way if an inventory management shortcut is utilized. Read the rest of this entry »

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Accounts Payable Days Analysis

I’ve written extensively about how important cash is to a business. The accounts payable days analysis is an indicator of how well you are managing cash. This measure is also known as the days payable outstanding.

Are Your Vendors Happy?

We all know how important it is to keep customers happy. Don’t meet their needs or make them mad and they may leave you. Even worse, their comments may cause others to leave with them. Just like customers, you also need to keep vendors happy. If you don’t you may find your credit line cutoff and that you cannot get essential products and services. Imagine what happens when you cannot get the product you need to sell or use in your manufacturing process. Pretty soon it impacts your company’s ability to satisfy customers. The accounts payable days analysis is a statistic you can calculate that indicates how good of a job you are doing managing accounts payable and keeping your vendors happy.

The Calculation

The calculation is straight forward using the formula:

(Accounts Payable / COGS) * 365 where COGS is cost of goods sold.

Granted that the COGS does not include every expense that goes through accounts payable, but this is the basic formula. With that said, let’s look at an example of the accounts payable days analysis. If your accounts payable balance is $500,000 and your annual cost of goods sold is $2,000,000 the calculation is:

($500,000 / $2,000,000) * 365 = 91.25 days. This seems like a lot, but it is important to consider your industry’s average days for paying vendors. If the industry average is 120 days, then by comparison your company does not look that bad. On the other hand, if the industry average is 45 days then this is an indication you may be getting ready to experience difficulties with your vendors if you haven’t already. Of course the days payable outstanding is only one thing to consider. Your company may not have the financial clout of your competitors and vendors may keep you to a tighter leash. If so, you will need to earn their trust. Basically, managing accounts payable should be made a priority. Unfortunately, like the balance in the cash account, the issue is not with the accounts payable account itself. The balance in this account is the result of activity in other areas.

Some Causes and Solutions

Probably the three biggest causes of the accounts payable days analysis being too many days are the following:

  • Too much inventory or the wrong mix of inventory, thus having too many days of inventory supply
  • Too many days of accounts receivable outstanding, resulting in not realizing cash from sales in a timely manner
  • Gross profit margins are too low

I have discussed the issues with accounts receivable (See Accounts Receivable Days Outstanding Analysis) and inventory (See Inventory Days on Hand Analysis) to show the impact of not managing these diligently. In a future posting I will discuss the importance of adequate gross margin.

All that said, the quickest ways to get accounts payable under control is to address the accounts receivable days outstanding and the days of inventory on hand. With accounts receivable this involve your customer credit policies and staying on top of collections. With inventory you will need to analyze the balance on hand by item and see which items are overstocked. With both accounts receivable and inventory you can use the 80/20 rule to help you decide where to start. See the blog posting 80/20 Rule for Receivables Management for how this works with accounts receivable.

Next Steps

I encourage you to make the accounts payable days analysis to see just how well you are doing. AimCFO is here to help if you need it or are just not sure how to go about this process.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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Things Financial Analysis Can Tell You

In Financial Statements are More than Results I touched briefly on financial analysis, but here I will go into some more detail. The real value of financial statements and other financial information is in the analysis. Allow me to elaborate.

A Simple Example

In math we might see the simple algebraic equation Y = 2X where Y is defined as the dependent variable and X is the independent variable. That is, Y’s value depends on the value of X.

Financial analysis is much like this in that we are looking at what independent variables drive Read the rest of this entry »

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Financial Statements are More than Results

It’s easy to get lost in all the numbers when reading financial statements, particularly for those who rarely read them. By financial reports I mean not just the big three; i.e. the Balance Sheet, the Income Statement, and the Statement of Cash Flow. This also encompasses the supporting schedules and analysis as well.

Results Matter, But

Taking just the three main financial statements, it is important to asses the overall results. For the income statement look at profitability, but also consider Read the rest of this entry »

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