| Too many businesses wait until a crisis | | | | to previous months and industry averages and |
| occurs before they start to focus on | | | | investigate any material difference or |
| improving their financial management. Often, | | | | change.A periodic inventory count is a |
| by that time, it can be too late. By | | | | fundamental requirement; any items that are |
| setting aside an hour now to evaluate the | | | | overstocked should be investigated.A sales |
| strengths and weaknesses of your company's | | | | forecast is vital, without it you lack the |
| financial management activities and systems | | | | necessary management information for |
| you can save a lot of time and aggravation. | | | | inventory control.Your target inventory |
| It can also help increase your profits, and | | | | investment should equal your normal |
| at the end of the day that is what it is all | | | | investment for core sales plus a built in |
| about.The following are five strategies that | | | | safety stock (for example if a re-order is |
| will help you start to build a strong | | | | delayed you want some extra stock on hand) |
| financial foundation and build value in your | | | | plus some amount for any anticipated growth |
| company.1. Set up a financial control | | | | in sales.You can use the following equation |
| systemThe first thing you need to start with | | | | to determine your economic ordering |
| is a control system so that there is | | | | quantity: SQRT (2SO/CP) whereSQRT = square |
| consistency in your process and procedures. | | | | rootS = anticipated annual unit salesO = |
| A control system is designed to prevent and | | | | fixed costs per orderC = annual inventory |
| detect errors in your daily activities. For | | | | carrying cost, as a % of a products purchase |
| example, is there is a standard way of | | | | priceP = unit purchase price for productNote |
| processing your receivables, payables and | | | | that the above equation attempts to minimize |
| inventory? If there are no standard | | | | inventory cost by answering the question of |
| guidelines to follow, there is probably no | | | | how much and how often you should order |
| control system.2. Have daily access to your | | | | inventory. It is not perfect; the equation |
| account informationMake sure that you can | | | | does not take into account volume discounts |
| access your account information every day; it | | | | and assumes that your demand is constant. |
| is invaluable to managing your cash | | | | However it is a tool that can be used to help |
| effectively. With most banks providing | | | | in your decision making process.The following |
| internet access at a reasonable cost, there | | | | are 10 questions you can use to review you |
| is no reason not to have instant access to | | | | inventory process:Do you have a sales |
| account information.3. Manage your cash | | | | forecast? Do you compare forecast to actual |
| componentsConcentrate on managing your three | | | | sales and adjust the next forecast |
| main cash components: accounts receivable, | | | | accordingly?Do you know which items account |
| accounts payable and inventory.Let's take a | | | | for 80% of your sales? These items should be |
| look at each component:Accounts | | | | managed closely.How fast can you get |
| ReceivableMake sure your credit and | | | | inventory?How do you order inventory?How much |
| collection system is working efficiently. Any | | | | inventory do you order? Do you order extra |
| excess investment in accounts receivable | | | | just to save a few extra cents?Do you know |
| increases the need to borrow more money to | | | | the cost of holding your inventory?Do you |
| avoid a cash flow deficit. That means that if | | | | rely on just one or two suppliers?How |
| you are carrying excess receivables you are | | | | frequently is inventory analyzed to determine |
| probably carrying excess debt and you have a | | | | obsolescence and makeup?Do you have a policy |
| direct cost of having to carry that extra | | | | of determining what is obsolete inventory and |
| debt in interest payments. Even if you | | | | how and when to get rid of it?Do you have an |
| finance the receivables through internal | | | | inventory reporting system to provide the |
| equity, there is still an indirect cost; the | | | | necessary tracking information?Accounts |
| opportunity cost of using that equity | | | | PayableAlthough you want to stretch your |
| elsewhere which could include expanding your | | | | payables as long as possible, much like you |
| inventory to increase sales, reducing debt | | | | offer attractive discounts to your buyers you |
| or earning interest on cash balances.Your | | | | should also take supplier discounts as often |
| accounts receivable collection period defines | | | | as possible if the terms are attractive |
| the relationship with the cash flow process. | | | | enough.Make sure your payables are tracked on |
| Every month you should be calculating your | | | | a regular basis - such as weekly - and that |
| collection period and comparing with previous | | | | your payment system runs smoothly.As with |
| periods and relating those results to | | | | receivables and inventory, complete a monthly |
| industry averages. Any material differences | | | | analysis of your accounts payable and compare |
| should be investigated.Your credit policy | | | | to previous periods and industry averages. |
| can influence your cash flow and earnings. | | | | Any material difference or change should be |
| Longer credit terms can increase sales and | | | | investigated.Make sure vendors understand |
| earnings, but any decision to offer more | | | | your company in case there is a situation |
| liberal terms requires an estimate of the | | | | where you need to stretch your payables. |
| trade-off between the cost of the larger | | | | You need a plan to deal with those situations |
| investment in accounts receivable and the | | | | where you may have an unexpected spike in |
| bottom-line benefits of a higher sales | | | | your payables.You should re-evaluate you |
| volume. Remember that increasing your | | | | vendors on a regular basis to make sure you |
| credit terms will bring in less credit worthy | | | | are getting the best value.4. BudgetIt is |
| customers which can increase your bad debt | | | | fundamental, you need to plan for growth and |
| expense. You can, however, use price | | | | you need to forecast for problems. You need |
| increases to offset more liberal credit | | | | to prepare a budget. Besides completing a |
| terms.When you develop a receivable policy, | | | | budget for expected sales, you should also |
| consider the following:Check the financial | | | | complete a budget for a disaster situation, |
| health of customers before offering them | | | | like your sales are cut in half. The benefit |
| credit. Consider obtaining cash on the first | | | | is very straight forward; it forces you to |
| order.Do not make your invoice terms too | | | | ask yourself how you will be able to keep the |
| generous.Charge interest to customers who pay | | | | company running in such a situation. It will |
| late.Give discounts for early payment.If you | | | | also point to areas where you may be able to |
| are offering discounts, the terms should be | | | | save money right away and free up cash flow. |
| attractive enough to encourage customers to | | | | It's like having a disaster plan; you only |
| take the discount. This can also serve as | | | | have to act on it when disaster strikes, but |
| an early warning signal; if a customer | | | | it is much easier to concentrate when you do |
| doesn't take the discount, or all of a sudden | | | | not have a crisis at hand.5. Develop a strong |
| stops taking the discount, then you may want | | | | relationship with your BankDevote attention |
| to investigate further before extending | | | | to building relationships with your bank. |
| credit as it could be a sign of financial | | | | Always keep them up to date on where your |
| trouble.Do not wait longer than 30 days for a | | | | company stands. If you hit a difficult patch |
| late payment before you take action; you need | | | | it is much easier to get your bank on board |
| to minimize your company's exposure to bad | | | | if they understand your business. Contrary |
| credit. Put it into dollar terms, if you | | | | to opinion, banks do not necessarily jump |
| have a $1,000 bad debt write-off and a 10% | | | | ship as soon as you fall into trouble. They |
| profit margin, you need to generate an | | | | are willing to work with small business |
| addition $10,000 in sales just to make it | | | | through tough times, and gaining their trust |
| back.InventoryFirst, keep in mind that | | | | to do so is much easier the more confidence |
| because of carrying costs such as warehousing | | | | they have in you and your company. They way |
| and insurance it is more expensive to carry | | | | to accomplish this is to be transparent in |
| inventory than to carry accounts receivable. | | | | your dealings and to give them timely |
| That is, reducing an investment in inventory | | | | financial information.Use you bank as a |
| provides you a larger bottom-line benefit | | | | resource for cash management. There are |
| than a comparable reduction in accounts | | | | products available that can increase your |
| receivable because you are also reducing the | | | | cash flow, or arrangements that can be put in |
| carrying costs.As with your receivables, it | | | | place to increase your interest returns. But |
| is important to complete a monthly analysis | | | | you still need to make sure they are cost |
| of average inventory held in days. Compare | | | | effective. |