Archive for April, 2010

27
Apr
10

WORKING CAPITAL DOES NOT EQUAL CASH FLOW

 

Working capital is often misunderstood for cash.  Working capital is the difference between all of your current assets (cash, accounts receivable, etc.) and your current liabilities (accounts payable, accrued expenses, etc.).  Notice that cash is actually only a part of this equation, and it is usually a smaller part at that.  So, what in the world is working capital?

working capitalThe easiest way to explain it is in terms of the number of days difference between when you pay for things and when you get paid.  Here is a simplified example:

Cash goes out to pay for parts and labor to build a widget.  After 10 days the widget is ready to be sold.  It takes another 20 days to sell the widget to a customer on credit (net 30 terms).  The customer pays early – in 25 days.  The total working capital cycle is 55 days.  Hence, the business needs to have enough “working capital” to fund this transaction until it gets paid. 

WORKING CAPITAL IS A CYCLE OF CASH FLOW

Based on the example above, a business will need a certain amount of “working capital” to handle this 55-day cycle.  But what if the company can improve its manufacturing process and get paid a little earlier, reducing its working capital days to 42?  This means the company would need less working capital to fund its operations.  Since most people confuse working capital for cash, we think a bigger number is better.  But companies that run an efficient working capital cycle require lower working capital, the sign of a well-run and efficient business.

26
Apr
10

Collections Performance

For Entrepreneurs, collection of accounts receivable balances on a timely basis is an important contributor to cash flow. The faster the collections, the better the cash flow.

How do you measure your collection process? How do you know that it is working well and your company is continuously improving its collection efforts?

One potential metric is Days Sales Outstanding (DSO). If you calculate your monthly DSO and monitor the trend, you will see the efficacy of your collections efforts.

Ratio analysis can be used to tell how well you are managing your accounts receivable. The most common ratio for accounts receivable is turnover.  This ratio is calculated as follows:

Accounts Receivable Turnover = Credit Sales / Average Receivable Balance.

Example : Annual credit sales were $ 400,000, beginning balance for accounts receivable was $ 55,000 and the yearend balance was $ 45,000. The turnover rate is 8, calculated as follows: Average receivable balance is $ 50,000 ($ 55,000 + $ 45,000) / 2. The turnover ratio is $ 400,000 / $ 50,000. This indicates that receivables were converted over into cash 8 times during the year.

26
Apr
10

Review your banking charges

Business banking fees and charges are sometimes based on an analysis of your cash accounts and the transaction activity within those accounts. The bank will give you an earnings allowance at a generally low rate and based on the average balance maintained in the account. Against this allowance will be fees and charges associated with all banking activity such as deposits, checks cleared, general account services, ACH services. It is very important to understand and review the monthly Account Analysis Statement. Banks will often include charges for services that you might not be using or even aware of. Also, the detailed listing of fees might reveal areas where you could save money by adopting alternative processes such as remote versus branch deposits, or electronic payments instead of paper checks. As they say, the devil is in the details; with reference to banking fees and charges, it could not be truer.

25
Apr
10

Commission Fees

Fidelity is the lowest in the industry per trade.

25
Apr
10

Superior Business Banking

Ran across a depositor called The Provident Bank.  They’re yielding 3.26 on liquid funds along with minimal restrictions on basis points. Earnings credits are competitive with industry leaders and they provide all the business banking solutions of your classic wealth management bank.  They’re brokerage sophistication may be reason for question.  

http://www.providentnj.com/site/Main.aspx

NYSE: PFS

23
Apr
10

Bank and Insurance platform solution provider

Great resource for business process knowledge expansion.  Largest provider of financial transaction processing solutions in the industry.  Ticker FISV

www.fiserv.com

20
Apr
10

Investing in a Professional Certification?

Are professional certifications worth the time and effort?

http://www.proformative.com/blog/ernie-humphrey/professional-certifications-can-they-impact-your-career