Business Tip: How "Efficient" is your business?
Some of the most valuable time a business owner can spend is with yea- ending financial statements, comparing to past years' performance and looking for areas in which efficiencies can be improved. For example, how efficient is your inventory turn in your business? What has the trend been for the past three years: improving or going the wrong way? In planning for next year, based on past performance, how can I improve the "efficiency" of my business?
Most businesses are looking for cash that they believe should be in the bank because of increased sales and/or profits. As a rule, the profitability of a business is measured on the Statement of Income, or Profit & Loss. Cash management of a business is shown on the balance sheet. To find out where your cash is hiding, an accurate, timely balance sheet will reveal the source of cash distress. Typically, your cash will either be hiding in inventory or accounts receivable. In a service business, inventory will be your hours you are paying your employees servicing your customers. A grocery store can look at their shelves and see their inventory.
I started this article discussing efficiency of your business. Let's take one area of a business and discuss the formula for finding your number for accounts receivable. You will be trying to determine the Accounts Receivable Turn-Days, how long are your customers using your money? To find this number, you will need your total Credit Sales, divided by your accounts receivable. The number you will have will be your Accounts Receivable Turnover. Take this number and divide it into 360 to determine your Accounts Receivable Turn-Days. Now what do you do with this number? How will it make your business more efficient? By itself, it will do nothing for you or your business. But, if you will do this for say the last three years, then see what your trend is, you will know more about your business. Secondly, you can look at your industry and see what an average is to compare your number to. You can also set a measurable goal for improving balance sheet "efficiency". One interesting result of this number is your ability to determine how many dollars in cash one day longer in collections is to your business. If you don't know or can't find your industry average, we can help you.
Joe Humphreys is the director of the UHV SBDC. The center offers counseling, training and technical assistance to existing and start-up businesses in an 11-county area. To make an appointment for business services or register for a UHV SBDC workshop, call the center at 361-485-4485 or email at email@example.com.