Posts Tagged ‘collections’

All Those Accounts Receivable are not Impressive

In a series of articles I’ve been focusing on how to manage cash and how managing assets, expenses, and liabilities impact it. Now I want to be a little harsh in one particular area.

Receivables are Every Where

Perhaps when you look at your financial statements and see accounts receivable that represent 70% or more of your current assets you are impressed. Should you be? Read the rest of this entry »

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Cash is a Necessity and Not a Luxury

Some companies think they are financially strong because they have lots of assets. But the makeup of those assets makes a big difference. What do I mean by that?

Can You Spend It

I touched on this earlier in the posting Read the rest of this entry »

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Sales and Accounts Receivable

Every company focuses on growing sales. That’s good, but how many also track the growth of accounts receivable? Often the growth of one does not mirror the growth of the other. Read the rest of this entry »

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Stop Giving Away Sales

So, are your sales are right where they should be or even better? Is that an accurate picture? It may be you need to stop giving away sales?

But, Isn’t a Sale a Sale?

It is easy to get excited when we see good or great sales numbers being reported. However, unless 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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Accounts Receivable Days Outstanding Analysis

About three years ago I wrote a series of three articles on ways to obtain low-cost cash. One of the articles was called 3 Low Cost Sources of Cash – Part 2 and concerned accounts receivable. In specific it discussed how the aging of accounts receivable might reveal an opportunity to generate additional cash, perhaps a significant amount. An alternative financial statistic to the accounts receivable aging that can help improve your cash position is the accounts receivable days outstanding. Let’s take a look. Read the rest of this entry »

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Improving Customer Payments

One of the biggest issues a business can face is past due customer accounts. Here are some ideas for improving customer payments to minimize the issue.

Deposits and Advanced Payments

If you are going to be spending significant amounts to complete something for a customer and it will take a while to complete, consider getting a customer deposit. Let’s say that you know the materials will cost $500 for something you will later bill for $1,000 to the customer. It will greatly improve your Read the rest of this entry »

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