The Chinese ideograph for THINK is 
. It is a combination of the ideograph for BRAIN 
and HEART 
. Don’t you think this is the best way to think?
Mothers think this way. 
graphics by Ren Garcia / image from Microsoft Clipart
Accounts receivable and accounts payable are reciprocal accounts. Your business’ accounts receivable are the accounts payable of the community you serve and your accounts payable are the accounts receivable of the community (e.g., suppliers).
Specially for small businesses, it is best if the relationships are not just cold impersonal exchanges of goods and dollars. Beyond the trust that underlies business transactions, there should be some concern and consideration flowing into / from both ends of the transaction. Even huge multinationals see this and spend a lot of public relations dollars in creating an image of concern and consideration for their customers.
A previous b5media post in Home Biz Notes (of Mary Emma Allen & Yvonne Russel) brings home this point more dramatically. The post (http://www.homebiznotes.com/my-mother-the-country-grocersuccess-isnt-always-what-you-think/) was written by Mary Allen and cited in http://www.accountingsolver.com/the-one-must-read-post/.
image from Microsoft Clipart
Tags: accounts payable, accounts reveivable, concern & consideration in business, reciprocal accounts, small businessesAccountingSolver received an insightful comment from Mary Schaeffer, Author Controller & CFO’s Guide to Accounts Payable (John Wiley & Sons 2007) & 12 other business books, Editorial Director Accounts Payable Now & Tomorrow (http://ap-now.com/blog/):
“I just read a post on another blog recommending payment stretching as a way of improving cash flow. And, to be honest, it will do just that - at least temporarily.
But the pundits that recommend this tactic overlook a few things. First, it will annoy the you know what out of your suppliers. They have no interest in becoming your banker - they are worried enough about their own cash flow. And, if you happen to also sell to them, they will take similar action. After all, what’s good for the goose is good for the gander.
But there is an even more insidious problem. Most suppliers, if they have not been paid in 30 days will issue a second invoice. This may or may not be marked Copy or Duplicate. And, a small number of these duplicate invoices get paid. So, all the savings from the payment stretching are given back (and usually more). So, much for payment stretching improving cash flow!
I should note that there are times when an organization will have no choice but to stretch payments. If cash is tight then delaying payment may be the only alternative. In those cases extra care should be taken to ensure no duplicate payments are made.”
Mary Schaeffer’s observation is one very important reason why there should be synergy between accounts receivable and accounts payable.
Your Days Receivable should always be less than your Days Payable so that you are able to pay your bills on due date and you don’t fall into the quagmire that Mary Schaeffer warns about.
graphics by Ren Garcia / image from Microsoft Clipart
Tags: accounts payable, Accounts Receivable, cash flow, cash management, suppliers' credit, synergyIn order to avoid undue pressure on your cash (as the increase in Sales pushes up your Cost of Goods), you have to make sure that your accounts receivable & accounts payable are synchronized. You have to make sure that the number of days in which you collect your accounts receivable (i.e., credit sales) is always less than the number of days in which you have to pay your suppliers (i.e., cost of goods).
In a small business with not so many transactions, it is easy to track days receivable and days payable. If / when your credit program / accounts receivable results in a growth in Revenues, your Cost of Goods will also grow in step with your Revenues. The number of transactions will also grow and it may not be as easy to track days receivable and days payable.
A simple formula for determining days receivable is:
The formula for days payable is:
You get the amounts for your accounts receivable and account payable from your Balance Sheet; your Cost of Goods and Credit Sales from your Income Statement. “Days” is based on the period covered by your Financial Statements (i.e., for the quarter, the half-year, etc).
Your Days Receivable should always be less than your Days Payable.
If it is the other way around, you will need more Working Capital because your collections will not be adequate to meet all your bills.
graphics by Ren Garcia / images from Microsoft Clipart
Tags: cost of goods, credit sales, days payable outstanding, days receivable outstanding, synergy, working capitalOne of the most effective ways of stimulating sales is by injecting a credit program into your sales program (i.e., set up an accounts receivable). If / when your credit program / accounts receivable results in a growth in Revenues as expected, your Cost of Goods will also grow in step with your Revenues.
In most businesses (specially where goods are produced), the greater portion of Working Capital goes into Cost of Goods Sold. One of the most effective ways of reducing the need for Working Capital is through suppliers’ credit or your accounts payable. It would be a great advantage if you were able to establish relationships with your suppliers where you can delay payments (say, 30 or even 60 days) with only a minimal increase in price or, better still, without any additional cost. In this kind of arrangement, you can actually pay for your supplies from the proceeds of your sales or collections –thus, lessening the pressure on your Working Capital requirements.
In order to avoid undue pressure on your cash (as the increase in Sales pushes up your Cost of Goods), you have to make sure that your accounts receivable & accounts payable are synchronized. You have to make sure that the number of days in which you collect your accounts receivable (i.e., credit sales) is always less than the number of days in which you have to pay your suppliers (i.e., suppliers’ credit).
image from Microsoft Clipart
Tags: accounts payable, Accounts Receivable, credit sales, suppliers' credit, synergy, working capital
One of the most effective ways of stimulating sales is by injecting a credit program into your sales program (i.e., set up an accounts receivable). If / when your credit program / accounts receivable results in a growth in Revenues as expected, your Cost of Goods will also grow in step with your Revenues. Make sure that your Cost of Goods per unit stays the same (of course, the absolute / total amount will grow). With your Cost of Goods per unit kept at the same level (and with your accounts receivable not exceeding 25% of your revenues), there shouldn’t be any need to increase your Working Capital.
You should also make sure that your Operating Expenses do not increase as a result of the increase in Sales / Revenues. The most common result of an increase in Sales is the need for more work space for production. You should not immediately succumb to the temptation to increase work space. First, make sure that your work space & production process are well-organized & optimizing available space. (My Organized Biz of Jennifer Hoffmann can help.) Also, you have to make sure that the growth in sales has stabilized and is not a flash in the pan.
If you are able to hold your Operating Expenses in check (or, at least, at a minimum increase), you can expect a significant increase in your Net Income (both as a percent of your Revenues and in an absolute amount).
graphics by Ren Garcia / image from Microsoft Clipart
Tags: Cost of Goods Sold, credit sales, Net Income, operating expenses, Revenues, sales growth, working capitalOne of the most effective ways of stimulating sales is by injecting a credit program into your sales program (i.e., set up an accounts receivable). However, you don’t want to have a lot of sales, but end up lacking enough cash to continue production and pay for operating expenses. Prudent thumb rules to follow are:
1 It goes without saying that you cannot extend credit of however short a term to customers whom you do not know or whom you know to have doubtful paying habits.
2 As a general rule, the portion of your sales on credit should not go beyond 25% of your total sales.
3 One way of estimating how much of your sales can be on credit is to check out how much credit & for how long a period businesses in your trading area (specially those in direct competition with your products) are giving. After finding out this information, estimate what you can actually afford and set it up as your accounts receivable policy.
4 In determining how much credit you can afford to extend, consider how much cash you need on hand to continue production (i.e., purchase raw materials & pay for labor) and meet operating expenses.
5 Be aware that, no matter how closely you scrutinize your customers before extending credit, there will be some (hopefully, only a few) who will not be able to pay on time or neglect to pay at all. Thus, a buffer percentage should go into determining how much credit you can actually afford (i.e., thumb rule #4, above).
graphics by Ren Garcia / image from Microsoft Clipart
Thank God for the blessings of the past week. Re-create yourself for the coming week.
Have fun with the children.
photo by Brandy Garcia
Tags: re-create with children, Sunday Thougts, thank GodWorking Capital funds the cost of the labor & materials that go into the goods you sell or the services you render (i.e., your Cost of Goods Sold or Cost of Sales) and what you use to pay for salaries, rent, office supplies, etc (i.e., your operating expenses). In most businesses (specially where goods are produced), the greater portion of Working Capital goes into Cost of Goods Sold.
What you want to do with your Cost of Goods is to turn it into cash as fast as you can (i.e., sales). One way of stimulating sales is to extend credit to your customers (i.e., set up an accounts receivable for valued / preferred customers). However, this puts pressure on your Working Capital –specially if your Cost of Goods Sold is more than 30% of your Revenues.
To mitigate the effect of postponing the receipt of cash from your sales to customers to whom you have extended credit, you have to make sure that the period in which you have to pay for accounts payable is longer than the collection period of your accounts receivable. This is doubly important if you have funded your Cost of Goods from suppliers’ credit.
A well-managed accounts receivable leads to less Working Capital needed.
image from Microsoft Clipart
Tags: accounts payable, Accounts Receivable, Inventory, Small Business Finance, suppliers' credit, working capitalWorking Capital funds the cost of the labor & materials that go into the goods you sell or the services you render (i.e., your Cost of Goods Sold or Cost of Sales) and what you use to pay for salaries, rent, office supplies, etc (i.e., your operating expenses). In most businesses (specially where goods are produced), the greater portion of Working Capital goes into Cost of Goods Sold.
If you are not able to sell your products (i.e., they remain in inventory), you put pressure on your Working Capital. You will need more cash (i.e., Working Capital) to pay for your operating expenses or to produce more goods to sell. It is important to know exactly how many days it takes to unload your inventory (i.e., sell your products) and recover the cash (i.e., your Cost of Goods Sold) tied up in your inventory. You have to know how long it takes to order your raw materials, have them delivered, and turned into products for sale. While you do not want to be in an out-of-stock position (thus, lost sales opportunities), you also do not want to let your Working Capital (i.e., your Cost of Goods) sleep in your storeroom.
A well-managed inventory leads to less Working Capital needed.
image from Microsoft Clipart
Tags: accounts payable, cash recovery, inventory management, Small Business Finance, suppliers' credit, working capital
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