Posts Tagged ‘accounts payable’

Manage Your Liabilities to Increase Cash

While accounts receivable and inventory are two assets that can dramatically impact cash, it is important to consider liabilities as well. Read the rest of this entry »

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Accounts Payable is Not Long-Term Debt

This will be a very short article. It is a follow up to Current or Long-Term Debt that discussed the appropriate use of various kinds of debt.

Accounts Payable

A comment made in a forum about accounts payable is what prompted this brief update on debt and how it is used. The commenter noted that a company was reclassifying some of its accounts payable to a note payable. When I heard this all kinds of bells and whistles went off. This is usually an indication of 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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Some Key Financial Indicators

If you are attempting to manage a business you must have timely and meaningful financial indicators. Many companies do this with some sort of financial dashboard, but whatever your method, here are a few things to be on top of.

Some Balance Sheet Data

Keep up with some key balance sheet data. This should be done at a minimum monthly, but preferably weekly or even daily, depending on the particular piece of information. Here are some of the key financial indicators to track: Read the rest of this entry »

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Talk to Your Vendors

Ever found your company unable to get products to sell or services needed to operate? If so, you’re not alone, but it is not hopeless.

Don’t Keep Me in the Dark

Probably one of the worse things you can do in dealing with vendors is to not keep them apprised of Read the rest of this entry »

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Balanced Approach to Financial Management

I remember a partner in a small CPA firm telling a story from early in his career. He said he had been given the task of creating a balance sheet for a client. When it was in balance he declared, “It balances, so it must be correct.” Of course the balance sheet must balance, but he quickly learned there was a lot more to it than that.

Balance Does Matter

One of the first areas where a company often displays a lack of balance is on the importance of the different financial statements. The income statement shows the results of activities over a specific period of time, while the Read the rest of this entry »

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Balance Sheet | A Different Look

When you look at a family photo there is something interesting that happens. While at first you may look at the group as a whole, if you look long enough you will invariably begin to think about specific individuals in the picture. You may think about the unique traits they have they you really like or even those traits that can drive you nuts. Do you sometimes find yourself thinking how much someone adds to your family? Perhaps you are even reminded of the challenges someone presents. So, what does this have to do with a company’s balance sheet?

The Balance Sheet in Total

At first glance a balance sheet may look like just a bunch of numbers, but we know Read the rest of this entry »

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QuickBooks – Know Your Roles

Understanding QuickBooks roles when using QuickBooks is critical, and the failure of an employee to know and understand their role can be highly destructive of the software’s usefulness. An example is the failure to use items or using them incorrectly.

Recording Sales

Items are essential to the correct functioning of QuickBooks. Without the use of items there is very little you can do in QuickBooks. Items are used in recording Read the rest of this entry »

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