In Pursuit of Profit
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Originally published: 1/12/2022
Census Bureau data indicates that U.S. retailers were holding onto $732 billion in inventory in July of 2022, which was a 21% increase compared to the year prior. Held inventory peaked in the US at the end of 2022, and while companies have made strides to work some of that down in the more than a year since, it remains high in many industries with consumer purchasing still depressed by economic conditions.
If your company is carrying an abundance of inventory, it is important to act quickly to get it off your books and out of your warehouses. Use this guide to understand why excess inventory is so costly, and what to do about it!
And while A/R problems are often errantly believed to exist most commonly at large companies processing a high volume of invoices every month, the research proves that to be false. The companies that tend to be the most behind are those processing between 300 and 2,500 invoices every month.
Clearly, small businesses are the ones most likely to have A/R issues, which is a real problem because the fewer invoices a business has, the more important collecting on each one becomes. For instance, if a company is processing 10,000 invoices every month, and 50 of them are outstanding, that is only 0.5% of its revenue that has not been collected; whereas, if a company is processing 1,000 invoices, and 50 of them are outstanding, that is 5% of its revenue that is outstanding every month.
Failing to collect on outstanding accounts receivables is a serious problem because, as the CFO Selections team explains, “The longer an invoice goes without being paid, the less likely it is to get paid at all. On average, 26% of invoices are uncollectable at the three-month mark, but that number rises to 70% at six months and 90% at 12 months.”
Either way, they typically come to us with their books in disarray looking for someone that can get them back on track and put the foundational elements in place for them to manage continued growth more effectively.
Their goal is not simply to have clean books for the mere sake of doing so. Their goal is to have the kind of accurate and timely financial information needed for strategic decision-making – enabling yesterday’s growth to fuel tomorrow’s growth as well. They understand that sustainable growth must be built on a solid financial foundation.
It all comes down to cash flow management. Cash flow is the tie that binds. Everything your accounting and finance personnel do is centered around managing the company’s finances to ensure they can acquire customers, run daily operations, pay staff, meet financial obligations, make necessary expenditures, and reinvest into the company. Simply put, they ensure that cash will be there today and tomorrow to keep the business going (and hopefully growing as well!).
So, what is a good cash conversion cycle?
If the economy slows down significantly enough for a long enough period of time, we will be in a recession. But regardless of what we call it, the economy is slowing down. We know this because current economic indicators show that:
These numbers reflect an economy that is surely slowing, which means that businesses must be prepared to react accordingly by preserving cash flow. The key in determining how to respond will be in understanding what this slowdown is going to look like for business activity.
The pandemic caused innumerable business obstacles, and among all the added barriers, accounting-related woes have emerged as a universal challenge.
Every day we talk with companies that are fighting the good fight to keep up with their daily accounting demands amid pandemic-related complexities. And while each business has a unique story, what we are hearing in the way of accounting challenges is starting to become predictable. Whether the pandemic has increased or decreased revenue, the common threads that unite companies these days are more work, staffing problems, late and messy financials, a lack of accurate and actionable information, and budget issues.
Written in conjunction with our partners at CFO Selections
A cash flow shortage is the number one reason why small businesses fail, but even mid-sized and large companies need smart cash flow management to survive and thrive.
Insufficient cash forces companies to make difficult decisions about who is going to get paid and when. Unfortunately, this can lead to vendors and suppliers being paid late, being overdue on rent, even employees waiting on paychecks.
It is not an exaggeration to say that cash is the lifeblood of any business. Not having enough money to pay for expenses can erode business credibility, which leads to:
Ultimately, a company’s potential will be stifled if there is not enough capital to invest in the assets that facilitate growth, and its very existence can be threatened as well.
So, are you ready to manage cash flow for the coming year?
As an accounting recruiting firm and financial services provider, we work with businesses everyday who ask, “Should we hire or outsource our accounting needs?”
This question is especially important for companies in the startup phase because they likely have significant cash flow concerns to consider. However, startups may also have other unique characteristics that make this question more challenging to answer, such as:
While every business will have their own unique needs and challenges, it is generally best for a startup to outsource their accounting activities initially and then hire internally as their needs change. Where does that shift happen?
A guest post from our partners at CFO Selections.
With an increased focus on financial planning and analysis (FP&A) in recent years, many companies have begun asking, “Do accountants do financial planning?”
For cash-strapped startups and small businesses the temptation to simply add to their accountant’s workload is strong. However, this is not a wise decision. While overloading any one role presents problems on its own, entrusting accountants with FP&A poses its own unique risks.
The differences between accounting and FP&A necessitate that it be handled by separate personnel with unique skillsets and performance objectives. Understanding what FP&A entails and what is at stake can help organizations make smart decisions about who should handle this critical responsibility.