Improve Cash Flow by Improving Accounts Payable Turnover

Accounts Payable Turnover

Accounts payable turnover is the simple function of how long it takes you to pay your bills. The question is how can you improve cash flow by improving accounts payable turnover?

Not much to discuss right?

Wrong.

As you’ll see in the video, especially with you look at your accounts receivable turnover alongside your accounts payable turnover, you might realize just how poorly you’ve been managing this. Improving accounts payable turnover can make all of the difference.

There is a careful balance here. If you take too long to pay your vendors, they may not want to work with you. If you are paying bills faster than you need to, you may be cutting yourself short.

When you try improving accounts payable turnover, you upset someone else’s accounts receivable turnover. Some years ago when a company did this to me I chose not to work with them. That’s the risk they ran, and they lost me. They were also unwilling to compromise.

Now you have all three major cash flow levers:

This is where you want to focus on improving your cash flow. You manage the three levers that are available to you, and make sure that your out-flowing cash is slower than in-flowing cash.

Next we can look at the “Financial Gap.”

Then we can answer a REALLY important question:

How much cash SHOULD your business have in the bank?

Coming soon to a browser near you…

Improve Inventory Turnover Improve Cash Flow

Inventory Turnover

Your inventory turnover is another lever you can pull in order to improve cash flow. Easier said than done? Of course. So instead of making excuses about how hard it is, let’s look at how to get it done! Let’s improve inventory turnover so we can improve cash flow.

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The very first thing you will want to do is count your inventory. I am often shocked at how many eCommerce companies I start with, and when I ask them when was the last time they took inventory I get that deer in the headlights look.

Counting Your Inventory

You can’t improve inventory turnover if you don’t know what you’ve got. There are other reasons for taking or counting your inventory. Counting your inventory gives you an opportunity to see what may not be salable anymore. Or if something is getting too that point.

Once you get a count, you give it to someone like me to post the inventory adjustment in QuickBooks Online. Now we have accurate inventory and Cost of Goods Sold numbers to work with. This is important.

Blow out old unsalable items

Want to bring in some cash quickly? Improve inventory turnover right away? Take all of your older inventory that isn’t selling off the shelf. Put in on a clearance shelf. Analyze that stock and figure out what your raw cost is. Just what you paid for it. No point in worrying about logistics or any other tangent costs.

Blow that inventory out. Even if it means taking a loss. You likely paid for that inventory a long time ago, and anything you can bring in for it now is better than $0.00.

Run a sale, offer coupons, and send out emails to your customers. Get rid of that stuff.

There is a cost to keeping it in the warehouse. Once you clear that stuff off the shelves you have more room to stock the stuff that IS selling.

Two ways to improve inventory turnover in order to improve cash flow

Bleed your inventory

This is the simple thing that you have more control over. Bleed your inventory levels down. If you are selling more than you are buying, that has a direct and positive impact on cash flow. It’s simple math. You are tying up less cash in inventory, therefore more of what you bring in stays in the bank because less is going out to buy inventory.

You can only do this for so long of course. Eventually you have to buy more inventory.

While bleeding your inventory levels, you will want to analyze how much of each product you need on hand, and what the appropriate reorder point and quantity should be. The goal is to keep just enough so that you never have to back order something. Nothing should sit on the shelves for more than 30 days in most cases. The exception might be really high value / high profit items. These will need to be there when ordered. Orders will be less frequent. Maybe as little as once or twice per year, but the profit on these items for even one or two sales per year, justifies their shelf space and then some.

The idea behind bleeding inventory, similar to blowing out unsalable inventory is to keep a closer eye on what sells well vs what doesn’t. The more often you can turn over a SKU (Stock Keeping Unit) the better your cash flow.

The strategy here is to bleed your inventory that doesn’t sell as well and stock up on what does. If an item sells twice as much as anything else, then it should take up half of your shelf space (in theory).

The point is to be strategic about your shelf space. Large retailers like Walmart analyse how many times revenue needs to be turned over per linear foot of shelf space. If you want what these guys have, you have to do what they do.

Increase Sales Volume

This is where you say, “tell me something I DON’T already know Nerd!” This is also the easier said than done part, but here’s the thing.

Stop saying, “easier said than done” and start thinking about how to do it.

  • Online advertising
  • Social media
  • Email campaigns
  • SEO

This means spending time and money. Welcome to business 101. You spend time and money on advertising and marketing and you generate sales.

If you have items that aren’t selling well, but you know they sell well elsewhere, then work on your SEO. Look at the descriptions on those items. Change them. Try different ideas until they start selling more.

Run some searches on your own products as though you were your own customer. See who comes up on top and analyze their descriptions. See what they are doing that is working where yours aren’t.

Most importantly get some guidance. Find people who are where you want to be and ask for help. People who aren’t directly competing with you, but who do well on Amazon and elsewhere.

Marketing and advertising is an art. You need someone who knows this. Someone who knows how to keep altering the mosaic until the picture comes together and the means results. All of a sudden something that wasn’t working before pops. You hit that tipping point, and now you’re scrambling to get orders fulfilled.

That’s when you know it’s working.

Watch the video above and post your comments and questions below.

Improve Cash Flow by Improving Accounts Receivable Turnover

Cash Flow is the lifeblood of every business. This is what makes the difference between the 34% of businesses that make it after 10 years vs those that don’t. It doesn’t matter if you’re profitable or not. What matters is that you have positive cash flow. That is what means the difference between making payroll or not making it. One way to improve cash flow is by improving accounts receivable turnover.

CashFlowTool.com makes this easy to manage. Try CashFlowTool.comClick Here

Accounts receivable turnover is the time it takes to collect a receivable. When you invoice a customer you may have net 30 terms, but how long does it REALLY take to collect?

You can calculate this amount as follows:

Accounts Receivable ÷ Net Credit Sales * 365

(eg)

A/R654,000.00
Net Credit Sales7,100,000.00
A/R Turnover33.62

In the above example it take on average 33 days to collect a receivable. This may or may not be good. It depends on the industry you’re in.

Whatever is considered good, you can always improve cash flow by lowering this number.

How to lower your Accounts Receivable Turnover number

This part is neither mathematical nor scientific.

Mike Milan gives a great example of how he did this in one of his former businesses in this episode of The Authentic Accountant Podcast:

The Speed of Cash with Mike Milan

You’ll have to talk to your customers (imagine that). This means there is a careful balance. If you lean too hard on your customers for faster payment, you can lose them.

The best trick for improving accounts receivable turnover is to get paid up front. I did this in my own business years ago. It was unheard of. As soon as I started doing it, people told me they respected it. Many said they needed to start doing the same in their business.

Look if your customer wants you to do the work right away, why shouldn’t they be willing to pay right away?

Short of that, you will have to find away to appeal to your customers to appreciate your situation and help you out by paying you faster. Most companies who struggle with their own cash flow will prioritize based on who can hurt their credit. That sucks, but it’s the hard reality.

As Mike puts it, you have to get them to think if you as an employee instead of a paper towel!

Need to take a closer look at improving accounts receivable turnover for your business?

Check out the video above and CashFlowTool.com (see video).

Here are some other resources on our website:

Speed of Cash Zoom with Mike Milan
https://nerdenterprises.com/speed-cash-flight-mike-milan/

Cash Flow Management with Cash Flow Tool.com
https://nerdenterprises.com/cash-flow-management/

How Your Company Can Be in the 34% that Make it After 10 Years

Most businesses fail within the first 5 years.

Ask google or siri, “how many businesses fail within the first 5 years” and you’ll get an interesting answer. If you get what I got, then the answer is that according to the Small Business Administration (SBA), about 30% of new businesses fail during the first two years, 50% during the first five years, and 66% during the first 10.

So in order to make it to the 34% that are still in business after 10 years, you first have to be in the 50% that make it beyond five years.

During the video above you will see me demonstrate a few examples of how you can use CashFlowTool.com to monitor critical areas of cash flow to help you make it to the 34%.

Try CashFlowTool.com and see it in action.

The question is why do these businesses fail?

The answers can be many and a lot of them subjective.

Are they bad ideas? I would guess probably not. Most of them are probably good ideas.

Not profitable? Could be, but I would bet a surprisingly high percentage of the businesses that fail are profitable?

The number one offender on business failures has to be cash flow.

The reason is purely logic. If businesses had sufficient cash flow, they would continue to stay in business.

It’s only when a company can’t pay its bills that it goes out of business. Now that could be because they aren’t profitable, but plenty of profitable businesses experience poor cash flow.

The classic example is a highly leveraged company. They could be profitable, but after paying off principal from loans they’ve taken out, there can be little or no money left for working capital needs.

If you have a good handle on your cash flow, you can sustain losses. This is often the case with startup companies. They survive on financing from owners, investors, or banks. Of course the business has to turn a profit eventually.

Having a good handle on your cash flow may be the most important aspect of running a business successfully.

Have you ever looked at your income statement, seen a nice profit, and then asked yourself, “where’s all the money?” or, “why don’t I have enough to pay my taxes?”

The answers to these questions are always found in your cash flow analysis.

You start with your net income.

Maybe it’s $100,000.

But you don’t have nearly that much in the bank!

There are a few places where your cash can be locked up.

If you scan down the balance sheet you’ll find them.

If accounts receivable is increasing that means you are earning the income, but you aren’t collecting it. That’s a problem.

If any asset on your balance sheet is increasing that means you are tying up cash in something. This isn’t necessarily bad. So you have to look at it.

If you’re tying up cash in inventory because you are stocking up for the holidays that is good. If you are using your normal working capital to do this, then you will want to line up some financing to cover your financial gap.

There are specific formulas around calculating how much cash you need in the bank at all times. And these are good to know, but the reality is there are tools that do this for you much faster than you can and with a much lower (or no) risk of error.

We’re in an age where we need reliable data and we need it fast.

Getting this data is what will keep us in the 34%.

Cash Flow Management with CashFlowTool.com

You must have access to cash at all times.” This is perhaps one of the most important pieces of advice I have been given to date from a mentor. Of course this can mean a lot of things. Access to lines of credit, and other debt instruments. Borrowing money is ok, especially when it’s being used to finance the expansion of the business. The best source of cash, however is your own, because it doesn’t cost you anything to use it! This comes down to really good cash flow management, and that’s what cash flow management with CashFlowTool.com is all about.

Most companies are driving blind.

I know that sounds crazy, but you’re just so busy trying to stay afloat that you can’t even think about getting ahead.

The one thing that would help you is having a way to access and analyze really important information really quickly. Even my own cash flow projections process can be laborious.

When Mike Milan first told me what Finagraph was doing with CashFlowTool.com I got excited. When I first saw CashFlowTool.com I was in love!

I work with a ton of small to medium sized business owners, and you know what they all want to know at a glance?

  • Forget all of the fancy KPI’s.
  • Forget analyzing ratios (and many of you know how much it pains me to say that, but it’s true.
  • Forget all of the BS that a million app developers want you to believe about what you need.

Who knows what you need better than you do?

I know what you want to know, because I’m the one you’re usually asking.

How much money am I making?

How much money do I have?

How long will the money last?

What can I do to bring in more cash and make things easier?

Easier to pay the bills for sure.

Easier to grow most importantly.

CashFlowTool.com gives you exactly all of this information, and then some.

Check out the video above and take a free trial here:

http://bit.ly/CashFlowNerd

Use Promo Code ‘Nerd’ so they know I sent you!

Ask your questions in the comments below, and join us on Facebook:

CashFlowTool.com Users Group

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