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