Posts Tagged ‘inventory’

Focus on Staying Current

You’ve probably heard that your stress level can by reduced by decluttering. Part of that decluttering involves getting current on activities. But after decluttering, then what?

Picture This

Most of us have the experience of having looked at a closest, garage, basement or desk that was cluttered. It can be Read the rest of this entry »

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Monthly Financial Checkup

Have you ever worked somewhere that always seemed to be financially in trouble? Were they surprised at this? If they were surprised then one of the main reasons could be that they were not sufficiently monitoring financial activity, specifically by performing a monthly financial checkup.

What Is a Monthly Financial Checkup

Before answering that question, let me ask one. Read the rest of this entry »

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Too Many QuickBooks Items

QuickBooks items are one of its most powerful features, if used correctly and wisely. If you use QuickBooks, perhaps you have encountered one of the following issues with items:

  1. You have exhausted or are close to exhausting the list limits
  2. You have so many inventory or non-inventory item numbers that you are overwhelmed

Here are some thoughts on using items in QuickBooks that may save you some headaches.

Know the Limits of Items

Each version of QuickBooks has limits for list. For example, in QuickBooks Pro 2014 the limit for item lists is 14,500. That means that the total of Read the rest of this entry »

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Small Business Change of Course

Have you ever reached that point where you realize that what you’ve been doing just isn’t working? Most of us have. This not only happens to individuals but businesses as well. Sometimes a small business change of course is unavoidable.

Some Examples

Look at some better known businesses that have had to change course; Sears, Circuit City, JCPenney, and K-Mart quickly come to mind. Of course, these are large businesses, but the same is true for small businesses. Read the rest of this entry »

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Do You Really Need Debt?

How many small businesses with debt really need it? If you are a small business here are some things to consider.

A Faulty Assumption Perhaps

As I follow others thoughts I cannot help from but be surprised at how many think that in order to succeed in business they have to take on debt. What makes this interesting is that so many of these are start-ups or very young businesses. Reading between the lines, I have come to the conclusion that many have simply assumed they would have to borrow to start or Read the rest of this entry »

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Debt Coverage

In the posting Why Debt Ratios Matter we looked briefly at what debt really is, one way of measuring it, and how the mix of debt and equity played a role in how appropriately a business was financed. Now let’s look at servicing debt, also known as debt coverage.

What Determines Debt Coverage?

Think about this from a personal perspective. Imagine you took out a loan to buy some furniture for your home, and it was one of those loans where you only paid interest for the first year. Starting in the second year you would be required to start 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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Inventory Days on Hand Analysis

In two articles around three years ago called 3 Low Cost Sources of Cash – Part 1 and Small Inventory – Big Benefits I discussed some of the benefits of keeping inventory to a level that would meet needs but would not be excessive. Let’s now look at a way to analyze inventory called inventory days on hand.

The Formula

The calculation for inventory days on hand is straight forward and is as follows:

(Inventory Balance / COGS) * 365 where COGS stands for Cost of Goods Sold. Let’s use the same numbers used in the first article mentioned above. If the inventory on hand is $1,000,000 and the annual cost of goods sold is $3,000,000 then the inventory days on hand is calculated as follows: Read the rest of this entry »

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Importance of Liquidity

In my last three posting, Necessity of Working Capital, The Current Ratio Matters and Quick Ratio Analysis we looked at three ways to asses a company’s liquidity. While working capital, the current ratio, and the quick ratio are useful liquidity measures, they may need some refinement. Let’s dig a little deeper and try to understand more about the importance of liquidity and why just the basic calculation of any of these may not be as helpful as we may have first thought. Read the rest of this entry »

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3 Tips for Managing Cash

In the posting Cash Management -It’s Not About the Cash Account we looked at how cash management is more about managing other accounts. The reason is that it is these other accounts, like accounts receivable and inventory, that ultimately determine your cash balance. Knowing that, are there some helpful tips for managing cash? Well, here are three.

Remember What Determines Your Cash

This may seem redundant, but you must always be cognizant of Read the rest of this entry »

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