Financial Accounts never have been the turn-on of an entrepreneur, however a good entrepreneur will at least understand a few key elements of the accounts they receive.
There is a saying that ‘Financial accounts should ask more questions than they answer’, we would go a step further and say that accounts rarely answer any question, they just generate more questions.
With this in mind we would encourage every business owner to pick a few key parts of the accounts that are relevant to them, then look at what is changing.
Let’s assume you are a retailer. You buy goods on credit and sometimes sell on credit, you also need to manage your stock.
So for you, Stock Days, Debtor Days and Creditor Days would all be useful information to have, after all your bank will have noticed if these lines change, so don’t be unprepared when they ask why. As we always say, know what they know, and never let your bank highlight a negative to you, always get in there first.
This is about managing inventory, making sure stock is in line with sales, and that there is no dated and unsellable stock.
So, take your year end accounts. Then use – Stock / Cost of Goods Sold x 365
This will give you a stock turnover period. If you are using monthly accounts then divide by 31 days, quarterly by 92 days etc.
Where there is a difference from one period to the next then ask yourself why?
How long it takes people to pay you. The key here is in ensuring you are getting paid and are in control of your debtors, chasing invoices etc. If cash is short then look closer at this line.
Take your year end accounts, Debtors / Sales x 365 then compare to last year. Again, if using monthly accounts divide by 31 days, or quarterly by 92 days.
This line is best compared month to month, look close when the figure rises, it could mean an impending cash shortage.
This is how long it takes for you to pay others, typically suppliers. A change here could mean two things. If it is shorter then have your credit terms been cut, or are you paying too quickly? If it is longer then is there a problem with cash flow?
For this, take your year end accounts then, Creditors / Cost of Goods Sold x 365
The same applies to monthly or quarterly accounts.
The figures are not as important as to why a change has occurred, make sure you know why, and if necessary have done something about it.
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