| |
| |
|
Management Information |
|
|
|
Five Strategies To Strengthen Your Company's Financial Management
Too many businesses wait until a crisis occurs before they start to focus on improving their financial management. Often, by that time, it can be too late. By setting aside an hour now to evaluate the strengths and weaknesses of your company's financial management activities and systems you can save a lot of time and aggravation. It can also help increase your profits, and at the end of the day that is what it is all about. The following are five strategies that will help you start to build a strong financial foundation and build value in your company. 1. Set up a financial control system The first thing you need to start with is a control system so that there is consistency in your process and procedures. A control system is designed to prevent and detect errors in your daily activities. For example, is there is a standard way of processing your receivables, payables and inventory? If there are no standard guidelines to follow, there is probably no control system. 2. Have daily access to your account information Make sure that you can access your account information every day; it is invaluable to managing your cash effectively. With most banks providing internet access at a reasonable cost, there is no reason not to have instant access to account information. 3. Manage your cash components Concentrate on managing your three main cash components: accounts receivable, accounts payable and inventory. Let's take a look at each component: Accounts Receivable Make sure your credit and collection system is working efficiently. Any excess investment in accounts receivable increases the need to borrow more money to avoid a cash flow deficit. That means that if you are carrying excess receivables you are probably carrying excess debt and you have a direct cost of having to carry that extra debt in interest payments. Even if you finance the receivables through internal equity, there is still an indirect cost; the opportunity cost of using that equity elsewhere which could include expanding your inventory to increase sales, reducing debt or earning interest on cash balances. Your accounts receivable collection period defines the relationship with the cash flow process. Every month you should be calculating your collection period and comparing with previous periods and relating those results to industry averages. Any material differences should be investigated. Your credit policy can influence your cash flow and earnings. Longer credit terms can increase sales and earnings, but any decision to offer more liberal terms requires an estimate of the trade-off between the cost of the larger investment in accounts receivable and the bottom-line benefits of a higher sales volume. Remember that increasing your credit terms will bring in less credit worthy customers which can increase your bad debt expense. You can, however, use price increases to offset more liberal credit terms. When you develop a receivable policy, consider the following:
Inventory First, keep in mind that because of carrying costs such as warehousing and insurance it is more expensive to carry inventory than to carry accounts receivable. That is, reducing an investment in inventory provides you a larger bottom-line benefit than a comparable reduction in accounts receivable because you are also reducing the carrying costs. As with your receivables, it is important to complete a monthly analysis of average inventory held in days. Compare to previous months and industry averages and investigate any material difference or change. A periodic inventory count is a fundamental requirement; any items that are overstocked should be investigated. A sales forecast is vital, without it you lack the necessary management information for inventory control. Your target inventory investment should equal your normal investment for core sales plus a built in safety stock (for example if a re-order is delayed you want some extra stock on hand) plus some amount for any anticipated growth in sales. You can use the following equation to determine your economic ordering quantity: SQRT (2SO/CP) where SQRT = square root
Note that the above equation attempts to minimize inventory cost by answering the question of how much and how often you should order inventory. It is not perfect; the equation does not take into account volume discounts and assumes that your demand is constant. However it is a tool that can be used to help in your decision making process. The following are 10 questions you can use to review you inventory process: Accounts Payable Although you want to stretch your payables as long as possible, much like you offer attractive discounts to your buyers you should also take supplier discounts as often as possible if the terms are attractive enough. Make sure your payables are tracked on a regular basis - such as weekly - and that your payment system runs smoothly. As with receivables and inventory, complete a monthly analysis of your accounts payable and compare to previous periods and industry averages. Any material difference or change should be investigated. Make sure vendors understand your company in case there is a situation where you need to stretch your payables. You need a plan to deal with those situations where you may have an unexpected spike in your payables. You should re-evaluate you vendors on a regular basis to make sure you are getting the best value. 4. Budget It is fundamental, you need to plan for growth and you need to forecast for problems. You need to prepare a budget. Besides completing a budget for expected sales, you should also complete a budget for a disaster situation, like your sales are cut in half. The benefit is very straight forward; it forces you to ask yourself how you will be able to keep the company running in such a situation. It will also point to areas where you may be able to save money right away and free up cash flow. It's like having a disaster plan; you only have to act on it when disaster strikes, but it is much easier to concentrate when you do not have a crisis at hand. 5. Develop a strong relationship with your Bank Devote attention to building relationships with your bank. Always keep them up to date on where your company stands. If you hit a difficult patch it is much easier to get your bank on board if they understand your business. Contrary to opinion, banks do not necessarily jump ship as soon as you fall into trouble. They are willing to work with small business through tough times, and gaining their trust to do so is much easier the more confidence they have in you and your company. They way to accomplish this is to be transparent in your dealings and to give them timely financial information. Use you bank as a resource for cash management. There are products available that can increase your cash flow, or arrangements that can be put in place to increase your interest returns. But you still need to make sure they are cost effective. About The Author Jeff Schein is a CGA and offers consulting, advice and coaching in the areas of business planning, business modeling, strategic planning, business analysis and financial management for new ventures and growing small businesses. Visit www.companyworkshop.com or mailto:jeff@companyworkshop.com
MORE RESOURCES:
Management - Google News |
|
|
|
RELATED ARTICLES
How to do SWOT Analysis for your Business SWOT analysis is needed for all business to understand how to improve their business.To have best SWOT Analysis we use below methodSWOT on Strengths that you can use for improving your business. Choosing the Right Corporate Training According to a Gallup Poll, 80 percent of employees said the availability of company-sponsored training programs was a factor in deciding whether to accept a new job or stick with a current one. And yet the Bureau of Labor Statistics says that the average number of hours of formal training per employee per year is only 10. Five Problem-Solving Success Tips The ability to solve complicated problems quickly is more important than ever in today's tough economy.From the time we're little kids, we're taught to solve problems by trial and error. Unravelling the Data Mining Mystery - The Key to Dramatically Higher Profits Data mining is the art of extracting nuggets of gold from a set of seeminngly meaningless and random data. For the web, this data can be in the form of your server hit log, a database of visitors to your website or customers that have actually purchased from your web site at one time or another. Manage Your Business from the Rockies, not the Prairies The day job as a manager is all about managing your people to deliver, to meet the needs of your customers or clients and generating success after success! Right? And you have consequences if that doesn't happen.Worst case scenario is that you lose your job or your business, because your people haven't delivered. Organizational Structure, Creativity, Innovation Organizational structure can inhibit or foster creativity and innovation. The problem with organizational structure though, is that it is resultant of many factors, including history, organic growth, strategy, operational design, product diversity, logistics, marketing, client base, supplier base and so forth. First Things First -- Process BEFORE Technology Here's a brief story I encountered while leaving Newark International Airport following a recent business trip. Hard to believe, but true. Identifying Candidates for Leadership A critical task in the succession planning process of any organization is identifying candidates. Traditionally, candidates have been identified based on past performance. Think it Over You can't solve a problem with the same thinking that created it. Albert Einstein Every decision is a deliberate act. Five Essential Hiring Practices Recruiting and hiring are often done in haste, leaving the company to repent in the long run. Today, there's a reason to be concerned about negligent hiring. Five Key Strategies for Making Your Nonprofit Business More Effective I love tennis both as a spectator and a weekend player. I also believe that effective nonprofit organizations are an essential part of vibrant, engaged communities. Knowing versus Doing - Execution In The Workplace Have you ever worked with someone who always seemed to have the answers; who always seemed to know what should be done; who could always quote the experts view on a certain situation, but for some reason, just couldn't perform as expected?Working with a client last month I was struck by the fact that my client was already very knowledgeable about the issue that we were discussing. As we talked through the situation it was clear to me that my client was well read on this subject. How to get an Audiences Attention A trainer dryly discussing how to motivate people in an organization basically has just another "point-by-point" presentation. But suppose that he mounts the podium and begins to speak. Challenge of ERP Implementation: Q and A with Rick Maurer Question: ERPs seem like a good idea, so why is return on investment so low?Answer: Resistance often kills many of these new systems. Even though the promise of what an ERP can do is high, the planners often fail to look at how the users are likely to view this "improvement. Delegation Obstructions OBSTRUCTIONS: 1. Staff deficiencies. Creative People, Innovative People The title implies that some people are and others not.This is a myth. Rapport - How to Build it with Your Team I've often heard managers say - "My door is always open, come and talk to me anytime."You have to accept the fact that your team won't always do that. How To Decrease Profits Without Really Trying Hurting your sales efforts can be accomplished easily with the proper guidance. The following effective yet simple ideas are designed to generate results when implemented into your sales strategy. Selective Job Cuts Often Benefits Firm More Than Broad Layoffs Over Long Term It is difficult to pick up a newspaper or listen to a business news broadcast without being greeted with the announcement of another massive corporate layoff or cutback. The economy catches a chill and, as a result, the corporate world catches a profits "cold. Downsizing in Organisations - The Real Truth I've met and worked with many people in all sectors of the business world and found that the majority of managers and team leaders are spending too much of their time on basic administrative tasks. Tasks for which they have had no training in.
|
| home | site map |
| © 2006 |
