Evaluating the Efficiency of Your Accounts Receivable Processes

You can ensure your company's accounts receivable processes remain efficient by reviewing the performance of the collection processes and key metrics associated with them. Below are some suggested metrics that you may consider integrating into your financial analyses in order to determine whether you are using optimal accounts receivable processes. 

Receivable Turnover Ratio - This is your credit sales divided by average accounts receivable.  This measures the number of times trade receivables turnover during the year, and is an indicator of how efficiently your company is collecting credit sales. Maintaining a sound accounts receivable practice and a strong credit policy help maintain the liquidity of your business. The higher the turnover of receivables, the shorter the time between credit sales and cash collected on those sales. 

Days Sales Outstanding - This measures the average time in days that receivables are outstanding or uncollected. Generally, the greater the number of days outstanding, the greater the probability of delinquencies in accounts receivables. The longer your credit sales remain uncollected increases the probability of the inability to collect those receivables. 

Accounts Receivable Follow-up - The increase of two or three days in sales outstanding can have a significant negative impact on the liquidity of a small to mid-sized business. Consider creating an account collection procedure that provides the actions and methods for processing late or delinquent payments. The account collection process should commence as soon as the account becomes past due. These functions and reminders should be automated wherever possible. 

Consider evaluating your accounts receivable processes based on these metrics and practices to improve the collection process of your credit sales. 

 

Forecasting vs. Budgeting for Small Business

Running a business presents many challenges, and there are financial practices available to assist in the planning and management of your company’s financial future. The use of financial forecasts and budgets 

 

can help you determine where your company is headed and how you can achieve your financial objectives and goals. People often use the terms "financial forecast" and "budget" interchangeably, but each provides distinct and essential functions. It is important to determine the functions of each in order to apply them effectively.

Forecasts - Make predictions or projections of expected revenue and expenses based on historical data, managerial expectation and foresight, and other factors into an uncertain future. A financial forecast seeks to predict a company’s financial position, cash flows, sales, expenses and other figures in the future. Forecasts are more flexible and will change as your company’s financial position and market factors change.

Budgets - A budget is a detailed financial plan consisting of a defined set of financial objectives that guide thedecision making processes and seeks to exercise control over the company finances and resources while guiding the company to where it needs to be. The objective is to insure that the company does not spend more than they are making in sales revenue. Often, adjustments must be made and are reflected in a “variance report." This report shows the budgeted amount compared to the actual amount realized. Budgets allocate money for specific purposes and are the objectives and goals set for the company.

Forecasting and budgeting are both financial practices that assist in preparing for a company’s financial future.  Typically budgets are prepared yearly, while forecast are prepared more frequently, usually monthly. Forecasts tend to change based on financial and market conditions, while budgets are more concrete.

It is essential for small and mid-sized companies to be aware of their finances at all times because one small operating error could spell disaster. That’s why it is critical for small and mid-sized company owners’ to forecast and budget. Knowing how much to spend and on what is the most important thing for a small business to stay solvent.

We are currently offering a free analysis of your forecasting and budgeting process. If you would like to learn more on how Alan Neal & Associates can help move your company forward, please call me at 423-756-4076 or email me at alan@alanneal.com
Alan Neal  CBA, CM&AA

Components of an Effective and Efficient Cash Management System

In any business, as the saying goes, "cash is king," but it's especially true for small and mid-sized businesses where minor fluctuations in cash flow can have a tremendous impact - either positive or negative. Even so, many companies do not have a formalized cash management system. Many business owners tend to concentrate on earnings, rather than cash flow. Companies don't file bankruptcy because they incur an accounting loss; they bankrupt because they do not have the cash to pay their obligations. 

Optimizing cash flow management is one of the most important tasks in achieving overall financial health. Efficient cash management goes beyond economic or financial planning. In order to convert your budgets and plans into cash forecast, you need a timeframe for transactions that generate income as well as those that relate to expenses.

An effectively administered and efficient cash management system will consist of:

Cash Flow Forecast - To effectively manage cash flow, you must be able to accurately forecast when you will receive cash and when cash must be paid out. The cash flow forecast covering a fiscal year should be based on the company's budget and adjusted for the timing of actual receipts and disbursements of cash for each line item of the budget. Using an accurate and detailed cash flow forecast, along with a detailed operating budget, enables businesses to evaluate future cash requirements, ensures that liabilities can be paid on time, and that capital can be secured to avoid a cash flow crisis. Optimally, businesses need to forecast daily, weekly, monthly, and annually, and compare the forecast against actual results and modify the budget and forecast when warranted.

Banking Relationships - The relationship between business owner and banker needs to be one of trust and partnership. The key is excellent communication. You need your banker on your side, and to make that happen, he needs to understand what you are doing and be confident in your expectations for the future. Your banker expects you to know much more about your business than he knows, and you need to keep him informed about your business and what you expect to happen in the future. The better you can project and forecast, the more confidence your banker will have in you, and the borrowing process will be smoother when the need arises. 

Line of Credit Access - Shortfalls in cash can be devastating to businesses, and depending on the extent of the shortfall, recovering can be difficult. Establishing a line of credit as part of your contingency plan offers benefits. In some cases a line of credit is the best solution to maintain liquidity. 

Investment Of Surplus Cash Program - Using your cash flow forecast and your detailed budget together ensures the availability of funds to pay liabilities and allows you to see the timing of surplus cash. Rather than allowing the bank to sweep the account, the surplus cash can be invested in higher yielding, safe investments. You can choose these investments based on the availability of the cash before it is needed to fund operations. Higher yielding investments will increase interest income and free cash flow, enhancing company profits and value.