by MHolland | Jan 27, 2021 | Accounts Payables
Cheques are becoming less common now. But not uncommon enough. Here are 5 reasons to wean your business from the cheque addiction (for those still afflicted) …
Reason No. 1 – Con Artists
Cheque fraud is bigger than online fraud by a country mile. A cheque circulates in physical reality. Thieves can acid wash your cheque, print their name on it, and cash it.
Reason No. 2 – Cost
The Canadian online bill payment service we use is inexpensive. Yet I have had business owners balk at the price. It is about $1.50 per payment for 20 payments.
A stamp is $1.07 now. Then there is the paper and envelope.
How about the time to print, get a signature or two, and stuff the envelope?
Then your bookkeeper has to record that cheque in the accounting system.
This adds up to $20 or more per cheque.
Check out this article on the true costs of cheques:
The Hidden Cost of Check Payments
Reason No. 3 – Convenience
When you need two signatures, and one person is away what do you do?
Mail it from person to person? Yikes! With Canada Post that could take weeks. Courier? Please see reason 2 above.
Some people pre-sign cheques when they will be away to avoid this problem. This opens up fraud. Please see reason 1 above.
Reason No. 4 – Covid
With Covid, the rules of engagement have changed. Your office may be closed. Where are the cheques? Can your bookkeeper get into the office? Yes?
Great! How about the signers? Both of them? Are all three working from the same office?
You get my point…
Reason No. 5 – Controls
With a solid online bill payment service, you set an accounts payable approval matrix. Vendor bills can be routed to as many people as you like, working from as many places as you can imagine.
This makes for a great audit trail. You can see each person who approved the payment.
Oh, and a really cool feature – you can see the actual vendor bill attached for easy reference!
So, what are you waiting for?
Want to know what we use? Kindly email me, and I will let you know…
by MHolland | Jan 21, 2021 | Accounts Receivables, Business Tips
Two weeks ago, I talked about the timing of your sales pipeline. Last week I wrote about your cash conversion cycle…
As a refresher, your Cash Conversion Cycle is the number of days – on average – it takes for you to convert working capital to cash.
You start with the number of days it takes to collect your accounts receivable. Then you add that to the number of days it takes to sell your inventory. Finally, you subtract the number of days you take to pay your vendors.
|
Business A |
Business B |
| Days to collect receivables |
40 |
25 |
| Days to sell inventory |
15 |
35 |
|
55 |
60 |
| Less – days to pay vendors |
(15) |
(25) |
| Cash Conversion Cycle |
40 |
35 |
Quiz – which is better, Business A, or Business B?
Business B. Why? Because it takes only 35 days, compared to 40 days to convert working capital to cash.
How can Business B get even better? By managing inventory better! It is 35 days on average to sell and only 15 days for Business A.
How can Business A improve? By getting paid quicker, and/or paying vendors a bit more slowly. It is taking 40 days to collect its receivables versus 25 for Business B.
Here are 6 ways to increase your cash-flow:
Way # 1 – Order Inventory Later
Inventory is money on the shelf.
I remember touring a warehouse once, years ago, and was shocked to see so many items laying on the floor. Other items were collecting dust. I said, “you know, if those were gold bars, would you treat them like that?”
Ordering the wrong stock too soon is going to tie up your working capital.
Order the wrong stock and you have trouble selling.
Too soon, (before people need or want), and again you have money sitting on a shelf.
An example of “too soon” is buying stock for Christmas in March. That said, if you get a great deal that could be a good business decision.
Inventory management is an art. It is related to three things:
- Timing of purchase
- Ability to re-sell the inventory quickly.
- Availability from suppliers
Way # 2 – Get Deposits from Customers Upfront
I believe Dell Computers had a negative cash conversion cycle because you pay for the computer upfront. Only then do they build/assemble it for you.
When I suggest getting deposits upfront to businesspeople the response is often – “I cannot. My customers will not accept that”.
How do you know? Who sets the terms?
If Michael Dell had asked his customers I am sure they would have said – “we prefer to pay on delivery”.
Michael Dell set the rules and grew a massive global cash-machine as a result.
Way #3 – Get Accurate Invoices Out Fast
The longer it takes for you to issue an invoice the slower the payment. This one needs no explaining, right?
Way #4 – Chase Those Receivables
Once you have sent your invoices – chase them with a system.
We use software that is incredibly friendly, powerful, and consistent. It is fully automated to chase our clients receivables for them.
This shortens the days your receivables are outstanding before becoming cash in the bank.
Way #5 – Only Sell to Credit Worthy Customers
It makes no sense to sell to someone who is a credit risk.
When they do not pay, you have lost more than the receivable.
As I have written about before, you lose the entire Gross Profit on that sale.
A bad debt of $1,000 is not $1,000. Take that and divide by your Gross Profit %.
$1,000/30% = $3,333.33.
To understand the philosophy behind this, please read this blog:
Top 7 Mistakes People Make in Managing Their Accounts Receivable
Way #6 – Take a Wee Bit Longer to Pay Your Payables
If you can, pay a wee bit more slowly.
Big companies and the government are notoriously slow payers to their vendors.
Develop a policy. Too many businesses just pay, well, whenever. The “whenever” is when a vendor screams loudly!
By all means, pay small vendors faster. For bigger ones, certainly pay a couple of days before due. Not sooner. BC Hydro will not need your money early. Pay it close to the due date.
Conclusion
Doing the above 6 things will lower (remember less is more) your cash conversion cycle.
Thanks for reading…
by MHolland | Jan 13, 2021 | Cash Flow
Last week I wrote about the early yardage predictor of cash-flow.
Do you remember? It is the estimated dollar figure of what is in your sales pipeline. And there is the timing aspect. This is the time it takes from connecting with a prospect to closing a sale.
This week we will look at what I call the back-end timing.
Now we look to the future. We look at one grand Key Performance Indicator. It is made up of 3 parts.
Let us take a look at…
What is Your Cash Conversion Cycle?
In a perfect business you have no accounts receivable, no inventory, and you pay your vendors later!
This translates to – you make a sale, and the cash goes into your bank right away.
Imagine you pay your suppliers in 30 days. Wow! Perfect, right? You get the money right away and pay your vendors later.
For most businesses, this is not how it works.
Why not?
Because for most businesses, you have accounts receivable, inventory to sell and accounts payable to pay.
Most businesses have money tied up in accounts receivable (money owed to you). Then there is a lot of cash invested in inventory for others.
The third number is favorable to you – paying your vendors later helps preserve cash!
Let us take a look now at what makes up the calculation of your cash conversion cycle…
Cash Conversion is Made Up of 3 Numbers
Three things make up your cash conversion cycle:
- The days on average it takes to collect your accounts receivable, plus,
- The days on average it takes to sell your inventory
- Less the days on average you take to pay vendors
Let us say it takes you an average of 27 days to collect your accounts receivable (amounts owed to you).
It also takes an average of 18 days to sell your inventory on hand.
You take 21 days to pay your vendors.
Your cash conversion cycle is simply the sum of the first two numbers less the 3rd number.
In this example, you add 27 days to 18 days, and you get 45 days. You subtract 21 days that you take to pay your vendors for the final number of 24 days.
Your cash conversion cycle is 24 days.
This is an estimated number and not a hard number. Each number is an average and it is based on the past.
Anything changes and boom, so does the number.
What Should Your Goal Be?
The trick to improve your cash conversion cycle is to get paid quicker from your customers, sell your stock on hand faster, and pay your vendors a bit more slowly.
Here is an interesting question…
Can you ever have a negative cash conversion cycle?
Yes!
Here, “negative” is great!
For instance, you get paid upfront for most sales, so your Days Receivable is just 3 days. You turn your inventory over super fast in 9 days. You pay your suppliers in 21 days.
So, let us do the math. Three plus nine equals twelve. Twelve minus twenty-one equals what? Negative 9.
This would be a ridiculously awesome business to have, provided it is profitable. It would always be cash-flow positive!
Thanks for reading…
by MHolland | Jan 6, 2021 | Cash Flow
Timing.
And timing has two aspects to it.
The first is the timing of the prospects in your pipeline.
What is the best early indicator of your cash? The value of the interested prospects in your sales pipeline. I will show you how to get that figure.
Firstly, we will look at the numbers.
Number 1 – Possible Prospects in Your Pipeline
At the top of your pipeline are all the possible customers/clients.
This number shifts based on economics. For instance, imagine you own a restaurant. The number of potential customers eating out – in a pandemic – goes down. (And you can seat way less too).
However, the number of people eating at home (and not traveling) goes up!
You need to pivot fast. You must get home deliveries going. Then find creative ways to market to these “eating at home” customers.
The first number are the total possible clients in your area, for your business.
What is next?
Number 2 – The Number of Actual Prospects in Your Pipeline
Now you need a hard number. Who have you been in contact with?
This could be number of prospects reached through social media, direct mail, print advertising, and radio as examples.
This number is the top of your funnel.
We will go through an example…
You own a technology business. To reach a prospect you decide to run an email campaign.
Next, and this is critically important. You need to define and refine your Number 1 above – the number of potential clients for you.
Perhaps everyone could use some aspect of your technology services. That number is too big. You realize you have expertise in, say, non-profits and charities.
Great! Now get more specific. You want the ones of a certain size. It could be based on sales, or in this case, total revenue from donations. Or it could be employee size.
You buy a list of all organizations in your targeted niche from a company like InfoCanada.
Now you start connecting, and connecting, and connecting.
You see, you have to find out how many contact points it will take, on average before one of two things happen. (1) you reach a natural dead-end, or (2) you obtain a new client.
In other words, how many emails – three, maybe four – followed up with a phone call before you stop or convert.
Which leads to the third number…
Number 3 – Your Conversion Rate
How many people in your pipeline are pondering becoming your client?
There are actually two conversion rates here. The first is – the percentage of prospects who went from a name on a list to actually engaging with you.
The final conversion rate is the percentage of clients looking who become clients.
I will show you how this works:
Conversion rate #1
- Number of names purchased to email to – 1,000
- Number of prospects who looked at your offering – 300
Conversion rate number one – 30% (300/1,000)
Conversion rate #2
- Number of prospects who looked at your offering – 300
- Number of prospects who sign up – 50
Conversion rate number two – 17% (50/300)
Each tells a different story. Number 1 tells you how effective you are reaching the right audience. Number two tells you how good you are at converting an interested prospect to a paying client.
As in Comedy, Timing is Everything
Knowing the length of time, it takes for a name on a list to become a client is critical.
With it you can calculate the value of your sales pipeline at any point in time.
This is known as your sales cycle timing. It varies from industry to industry. A general rule of thumb is that the higher the value of what you are selling, the longer the sales cycle. It can even be years in some cases.
Before you get to the final number, you must know one more number. Your average sale!
Now you can create a cash-flow forecast with that solid dollar value of projected sales. You multiple the average dollar value of a sale, by the expected number of clients. You place that dollar value into the future month based on your average sales cycle.
Then you test, measure and tweak.
In Summary
Next week, I will write about the second aspect that affects your cash-flow timing.
Thanks for reading…
by MHolland | Oct 28, 2020 | Accounting Software
Submitting expenses can be a pain…
For you. For your employee. For your accountant.
With Xero Expenses it is easy to submit expenses.
Why use Xero Expenses?
Let me give you 3 reasons…
Reason #1 – It is Super Easy for Your Employee
With Xero Expenses you start by adding your employee as a user in Xero. You assign them “expenses”.
In the set-up you only need to give them “coding” access to the accounts they will use most of the time.
I will explain.
For instance, a salesperson will have expenses in just a few areas. Things like meals, mileage, auto repairs, office supplies, and maybe advertising.
You can “assign” just those 5 accounts to this employee. They do not need to go hunting through your entire Chart of Accounts to figure out where to code the receipts.
Now, here is where it gets cool.
Your employee just has to download the Xero Expenses app from Google Play or Apple Store.
From there they snap a pic of a receipt.
The software will extract the details for them – date, amount, vendor, and GST.
The employee checks for accuracy. They then code it to one of those 5 assigned accounts.
They hit submit.
Boom. Done. That was easy.
Reason #2 – It is Super Easy for You the Manager/Owner
Your employees have submitted the expenses.
You are an “approver”.
All you need to do is look at the expenses. Keep in mind all the receipts get attached for ease of review.
You hit the “approve” button on each receipt.
The items go to “bills to pay”.
Reason #3 – Plooto Makes it Easy to Pay
So far what has happened is that your employee has snapped pics of receipts on their smartphone. They have coded them.
You have reviewed and approved.
Now, your bill-payer software, Plooto takes over.
Plooto takes a look automatically inside Xero to check for bills to be paid.
It pulls over all the “approved” receipts for that employee.
In Plooto you look and pay those amounts. You can even take a last-minute peak at the receipts attached to each expense. All inside Plooto (it pulls the receipt with the amount to be paid).
You hit, “pay”.
Boom. Employee paid.
But wait! Plooto is not done yet.
It records the payment inside of Xero for you.
The cycle is complete.
Thanks for reading…
