by MHolland | Jun 20, 2024 | Accounts Receivables, Cash Flow, Cloud-based Accounting
When is a sale a sale?
When the services are completed and you send an invoice?
Okay, that may be when you book the sale in your accounting ledger, true.
Consider this…
A sale is not a sale until the money hits your bank account.
This is not how we do it in accounting unless we are running a cash business.
I have witnessed many businesses get aggressive in selling just to report impressive top-line growth.
What gets missed are these things:
- Time it takes to collect.
- Customer satisfaction.
- Credit worthiness of your customer.
- Your Gross Margin (I will explain…).
- The accuracy of your invoice.
- Did you fulfill what was agreed upon?
- Follow-up.
Time To Collect
The longer it takes to collect the less likelihood you will collect.
On a graph it will look like a Black Run downhill ski slope. As time goes on the percentage declines drastically.
Again, a sale is not really a sale unless you can collect it!
Customer Satisfaction
What the heck does customer satisfaction have to do with getting cash in the bank?
Well, when you think about it, an unhappy customer/client will likely resist paying you on time.
This loops back to number 1 above, “Time to Collect”.
This is a toxic cycle where an unhappy customer ignores your invoice and then refuses to pay down the road.
One way to avoid, is an outgoing customer satisfaction survey at the point of sale or shortly after.
Unhappy results can be nipped in the bud before it is too late.
Credit Worthiness of Your Customer
Have you done a credit check?
I remember checking the books of a business in a small town that sold electronics and home appliances.
Their sales were terrific! As in, off the charts for a small-town store.
The problem was that (on further examination of their accounts receivable) the sales staff were paid solely on sales commissions. It did not matter if the customer paid or not.
Credit sales were accepted often without background checks.
We discovered a TV had been sold to a fellow in prison! 😊
Hmmm, try collecting that one without backup!
Can these really be considered sales? More like store theft…
Your Gross Margin
Look at your Gross Margin as a main Key Performance Indicator by product line every week/month.
I know that this has less to do with, “when is a sale a sale” and more to do with cash in the bank.
Why?
Because if gross margins are declining it means:
- Discounting is happening.
- If discounting is happening, margins will be less, and perhaps not enough to cover your fixed costs.
- It also could mean that the business is less competitive and getting desperate to make sales at a lower margin.
The Accuracy of Your Invoice
Sales invoices should be sent out with 100% accuracy and fast. At the point of sale or rapidly after.
If you send out invoices that are inaccurate, your customers may, again sit on them, and refuse to pay.
The longer they are outstanding, remember the likelihood goes down that you will collect.
Did You Fulfill Your Agreements?
If the expectations of the sales transaction were not met, or there was any underperformance, then your customer/client may refuse to pay.
And often they do not tell you when they are irritated by underperformance, They just do not pay.
Again, a sale is not sale until the money hits your bank account.
Follow-up
When should you follow-up on your sales?
Within days.
Ask the correct person (usually an accounts payable clerk at your customer’s office) if they:
- Received the invoice.
- Have any questions?
- Is the invoice accurate?
- When can you expect payment?
By being proactive you set the stage for early payment.
The follow-up on their promises!
And keep following up. With persistent, firm kindness.
The old cliché “the squeaky wheel gets the grease” is applicable in getting paid on your receivable.
Remember, a sale, from a business point of view, is not a sale until it is in your bank account!
Thank you for reading…
by MHolland | Jun 11, 2024 | Accounting Software, Accounts Payables, Accounts Receivables, Cloud-based Accounting
Artificial Intelligence (AI) is the buzzword in business these days…
Will AI replace human accountants?
The short answer – no.
Why?
Because AI cannot flag errors, recode, interpret data correctly all the time, nor communicate with emotional understanding.
By the way, did you know that there are three different types of AI?
They are:
- Machine learning – this is where software recognizes patterns in data.
- Predictive AI – this is where the software uses those learned patterns to suggest actions to users.
- Generative AI – where software uses learned patterns to create new content, i.e. writing text and creating images.
AI in accounting is largely of the Predictive type. It is used to extract data from source documents, and to suggest actions (in coding and matching transactions).
Let us explore how AI is used in the suite of software we use for our clients at ControllershipPLUS.
Source Document Extraction
Here in our front-end software called HubDoc AI goes to work in extracting the core details from supplier bills, in addition to other source documents.
Within seconds of a supplier bill being uploaded or emailed to HubDoc the key details are extracted automatically:
- Vender name.
- Date due.
- Total amount.
- Taxes, including GST, PST, and HST.
HubDoc, based on predictive AI will suggest the account code to code the expense to. It will suggest this based on the past coding of that supplier.
For instance, Telus, a large telecom provider in Canada will usually be coded to “telephone” expense, if that is where you coded it in the past.
However, if the Telus bill is not for a telephone expense, rather it is for cell phones purchased, it may need to be coded somewhere else, like a capital account, “Telephone equipment.”
Human intervention is needed at this point because although predictive AI is good at extraction and making suggestions, it is not smart enough to know what to do with a new situation!
A highly intelligent accounting technician is needed to review and watch for exceptions and recode the suggested coding by AI.
In accounting, our human technicians are definitely much smarter than the AI.
Where predictive AI shines here is in the time saving of mind-numbing data entry tasks.
Okay, let us head on over to Xero next, where these extracted documents have been sent to within these now coded transactions….
Xero – Here AI Makes Suggestions
Inside Xero, the predictive AI matches transactions fed into it directly from the bank feeds.
It suggests which transactions likely match what went through your bank accounts.
The risk here in relying on AI is that the AI is not that smart. It only can suggest a match. If there are multiple transactions with the same dollar amount if you blindly accept the suggestion from AI, you may be wrong.
Here again, human intervention is required to manage and review, and not unconsciously clicking the “OKAY” button.
Xero and Accounts Receivable
Inside the bank feeds, Xero’s AI will suggest matches of deposits. This saves time in looking up the correct transactions to reconcile.
Unpaid deposits remain in aged accounts receivable.
Xero sends reminders of outstanding invoices to your customers and clients. I am not sure how this can rightly be called AI as it is just a routine, fixed scheduling task. Nevertheless, it does save time for the accounting technician.
Bills approved for payment now are sent over to Plooto…
AI and Plooto
The key features of AI in Plooto are:
- Two-way synchronization. Bills are automatically synced to Plooto from Xero, along with all attached source documents. Once they are paid in Plooto, they are synced back to Xero and recorded as a payment against the bill just paid.
- Plooto allows for customizable approval processes. These save time by reducing chasing people physically in different locations to sign cheques.
- Plooto leverages AI to encrypt all date keeping everything tight and secure.
The predictive AI here is not really thinking for you in a way that you might imagine AI to be working. It does, though, save accounting technicians from doing boring, repetitive tasks.
Fathom and Smart Prediction
Our high-end reporting software, Fathom, picks up all the month-end date from Xero on a regular, automated basis.
Inside of the forecasting module of Fathom it uses what it calls Smart Prediction to predict future revenue and expenses when doing a forecast.
Again, highly intelligent accounting technicians are required to intervene and not assume that the software’s predictions are written on stone tablets!
In Summary
Predictive AI really has stripped many mundane, repetitive tasks from accounting technicians. It has freed them up to add true intelligence to the mix. To analyse and override and to ensure that transactions are coded correctly, and that cash-flow projections make sense based on our knowledge of our client’s businesses.
Thank you for reading…
by MHolland | May 7, 2024 | Accounts Receivables, Business Tips, Cash Flow
We use ApprovalMax software for many of our clients to route supplier bills to various Department heads to approve those bills.
An audit report with a time stamp gets attached to each bill showing when and who approved each bill. The approved bills are now ready to be paid.
Now, ApprovalMax has added Sales Quotes and Invoicing workflows to its cutting-edge software.
Here is the basic workflow…
Number 1 – Create Quotes
Inside the ApprovalMax software you can create a quote for your customers/clients.
Templates can be used to speed up the Quote Creation process.
By using pre-defined templates, the creation of the Quote will take less time.
Number 2 – Approve Quotes
The created Quote will now be routed automatically to an Approver in your company.
The Approver can check the quote for accuracy, completeness, and whether any discounts apply.
This will add an Audit Report to your quote to ensure that you have a complete Audit Trail in case there are questions or disputes later.
Next, you can…
Number 3 – Send Quotes
You can send the Approved Quote from Step 2 above to be emailed directly to your client.
There is no need to email the quote yourself. ApprovalMax will take care of this step automatically.
The software will also attach any documents to it that you want your client to see.
The final step is…
Number 4 – Accept Quotes
Now, your customer or client can accept (or reject) your quote automatically.
You will get instant notification when they do!
This allows your Sales Team to track the status of quotes and follow-up on them.
Now that your customer has automatically received and approved a quote you can also speed up the invoicing process.
Here is a typical workflow for invoicing…
Number 1 – Create Invoices
You can now instantly turn your accepted quote above into a sales invoice, using all the details you setup in the Quote.
This will reduce errors because you are not re-keying in the details into an invoice template.
By getting your invoices out more quickly and accurately, you will speed up the turnaround process of converting your accounts receivable into cash.
The next step is…
Number 2 – Approve Invoices
The created invoice can now be sent to an approver (Sales manager, or department head for example) to approve the invoice.
Number 3 – Send Invoices
The approved invoice is sent right away to your customer from ApprovalMax.
By eliminating endless back and forth emails during the invoicing stage and trying to match up the quote with the details on the invoice, you will speed up your cash conversion cycle.
Here is a summary of the benefits of using ApprovalMax for your Quoting and Invoicing processes…
Summary of Benefits
- No more back-and-forth manual approvals via email. Everything stays in one place with Audit Reports attached to each transaction.
- Speed up your approvals. By sending quotes and invoices directly from ApprovalMax everything will flow much faster.
- You will reduce errors. Having someone approve each quote (it also can be more than one set of eyes by the way) this will reduce errors. Also, by creating invoices from quotes you will be able to avoid duplicate entries.
- Get a full picture of your Accounts Receivable at each point in time – who has created a quote/invoice, who has approved it, and what pending approvals are out there for quotes.
- Protect your business. You will be able to confirm and approve details of the job such as service availability and delivery dates when you bill customers. You further protect your business by having an audit trail of approved quotes both internally and by your customers/clients.
Finally, there is no duplication using ApprovalMax as all quotes and invoices are synced back to Xero for managing payments on account and bank reconciliations.
Thank you for reading…
by MHolland | May 1, 2024 | Accounts Payables, Accounts Receivables, Business Tips, Cash Flow
Over the last two weeks I wrote about how the three main financial statements of your business contain five sections as follows:
- Assets (the things you own)
- Liabilities (what you owe)
- Equity (what’s leftover for you)
(the above 3 sections are on the Balance Sheet)
- Revenues (the inflows into your business)
- Expenses (the outflows from your business)
(the above 2 sections are on your Income Statement)
To understand the story of your business month by month, year by year you need a sharper focus.
That sharper focus can begin with ratios.
Two weeks ago I wrote about liquidity ratios and profitability ratios.
Last week I wrote about Activity Ratios, namely Average Days Inventory, Average Days Receivable, Average Days Payable, and Cash Conversion Cycle.
This week I will write about…
Leverage Ratios
Leverage ratios measure the overall debt level of a business.
It is an indication of the business’s ability to repay new and existing loans.
A very low ratio can indicate a very cautious business that may be missing out on growth opportunities.
On the other hand, in a tough economy, too much debt can cripple your ability to repay your debt.
When interest rates are very low debt can be seductive, almost like an offer of free money.
However, when they go up, unless you have a highly profitable business and excellent cash-flow the interest expense alone can cause severe financial distress.
The way to manage your debt is to create a Forecast that looks at what could happen if rates climb and create scenarios for that possibility.
The other thing to do is to lock your loans into the longest term possible with a fixed rate of interest.
Here are two examples of leverage ratios…
Debt to Equity Ratio
This is a very simple ratio, calculated as follows:
Total liabilities divided by total shareholder’s equity.
A high ratio will indicate a business that is highly debt dependent and may have challenges getting additional loans if the economy is in a recession.
Bankers will look at a low ratio as being favorable to issue new loans. They will see that the shareholders have financed most of the assets.
Another leverage ratio is…
Debt to Asset Ratio
This ratio will indicate the proportion of assets financed by debt.
A ratio of greater than one will be an indicator that most of the assets are financed by debt.
The above two ratios indicate how much your business is at risk of economic downturns and increasing interest rates.
The next ratio will tell you how much profit you have to service your debt…
Debt Service Coverage Ratio
A high debt service coverage ratio tells you how much you have to cover your interest and principal debt payments.
First, you need to determine your EBITDA. This stands for Earnings Before Interest, Taxes, Depreciation and Amortization.
You take your EBITDA and divide it by your total interest and principal payments.
A high ratio here is preferable.
It will indicate that you have a lot of coverage to pay your financial obligations.
In Summary
Bankers will look at your leverage ratios closely to determine if you qualify for new loans.
Overall, the four sets of ratios we covered in these past three weeks tell you a story about your business that just looking at the main five sections will not.
Your profitability ratios will tell you how profitable your business is, and whether you are charging enough for your products and services. It will tell you how efficient you are in managing your business resources to generate a profit.
Your liquidity ratios will inform you of your ability to pay your obligations as they become due.
Your activity ratios will tell you two things:
- How well you are managing your working capital – cash, accounts receivable and inventory.
- How quickly you convert your working capital assets into cash.
Your leverage ratios will tell you and your banker how leveraged you are, and whether you have more than enough to cover your interest and principal payments.
Thanks for reading…
by MHolland | Apr 24, 2024 | Accounts Payables, Accounts Receivables, Cash Flow, Cloud-based Accounting
Last week I wrote about how the three main financial statements of your business contain five sections as follows:
- Assets (the things you own)
- Liabilities (what you owe)
- Equity (what’s leftover for you)
(the above 3 sections are on the Balance Sheet)
- Revenues (the inflows into your business)
- Expenses (the outflows from your business)
(the above 2 sections are on your Income Statement)
To understand the story of your business month by month, year by year you need a sharper focus.
That sharper focus can begin with ratios.
Last week I wrote about liquidity ratios and profitability ratios.
To recap, liquidity ratios – the main one being your current ratio – tells you how well you are able to pay your bills as they come due.
The profitability ratios include your Gross Profit Margin, your Net Profit Margin and Return on Equity. These tell you how profitable your business is and what your return on investment is.
This week I will write about…
Activity Ratios
There are three main activity ratios:
- Average days inventory
- Average days receivable
- Average days payable
The above three ratios can be summarized in what is called your Cash Conversion Cycle.
The intent of the above ratios is to show you how quickly you sell your inventory, convert your accounts receivable to cash and the time you take to pay your bills in order to conserve cash.
First, let us look at…
Average Days Inventory
To calculate this ratio, you first take your opening inventory for the period (month or year) and add this to your closing inventory. Then divide by two.
Take this average and multiply by the days in the period (for example 30 or 31 for a month) and divide this by your Cost of Goods Sold for the same period.
The smaller the number the better. A smaller number means you are selling your inventory more quickly. A longer number of days means your cash is tied up in inventory.
The next ratio is….
Average Days Receivable
This measures the average number of days customers take to pay for your goods or services.
For example, if you give your customers terms of 30 days, and your days receivable are running at, say, 25 days, then you are doing great.
You calculate your days receivable as follows:
Opening Accounts Receivable at beginning of the period (month for instance) plus Closing Accounts Receivable at end of the period divided by two.
Now, take the average accounts receivable times the number of days in the period (30 or 31 for a month) and divide that number by your Revenue for that same period.
Even if you have a small number, which is great, it is important to review each aged account receivable.
This is because fast payers can bring the average down, hiding slow payers.
In a tough economy, you are only as successful as your clients are successful.
The other thing to keep in mind is that your accounts receivable is what your customers will want to stretch out as long as possible. Your account receivable is their accounts payable!
The best way to get your receivables paid fast is persistent, constant communication. The cliché “the squeaky wheel gets the grease” applies here.
A large bad debt could cripple your business.
Now, let us examine…
Average Days Payable
This is a measurement of how long you take to pay your supplier bills, on average.
For this Key Ratio, longer is better.
Why? Because it means you are holding onto your cash longer.
However, you will not want to jeopardize your relationships with your suppliers.
You calculate average days payable as follows:
Opening accounts payable plus closing accounts payable (for the period) divided by two.
Take the average as above times the number of days in the period and divide that by the Total Cost of Goods Sold for the period.
Now, we can summarize all three of the above ratios into one number…
Cash Conversion Cycle
Your cash conversion cycle is the number of days, on average, it takes to convert your working capital into cash.
Here is how you calculate this ratio:
You simply add your Average Days Inventory to your Average Days Receivable and then subtract your Average Days Payable.
Let us assume you take 60 days on average to sell your inventory, and 20 days on average to collect your receivables, and 40 days on average to pay your supplier bills.
Your Cash Conversion Cycle is 60 + 20 – 35 = 45 days.
Is it possible to have a negative Cash Conversion Cycle?
Yes!
Let us say you turn your inventory every 20 days and collect your accounts receivable in 15 days and take 40 days to pay your bills.
Your Cash Conversion Cycle will be: 20 + 15 – 40 = negative 5 days.
This is awesome, and the sign of an extremely healthy business.
Thanks for reading…
by MHolland | Apr 18, 2024 | Accounts Payables, Accounts Receivables, Business Tips
Your monthly financial statements tell you a story….in the language of numbers…
Every business has three main financial statements:
- The Balance Sheet
- The Income Statement
- The Statement of Cash Flows
The Balance is the main statement. What? Not the Income Statement?
Yes, it is true that most businesspeople will focus most of their attention on the Income Statement.
They do this because the Income Statement shows the results of activities over a period of time – a month, a quarter, a year.
The Balance Sheet has all the information to determine the heath of a business at a specific point in time.
Did you know that the Income Statement and Statement of Cash Flows are each derived from the Balance Sheet?
The Balance Sheet is the fulcrum of the three statements.
The Big Picture
The story that your financial statements are telling you starts with the big picture.
Let us break it down…
Your Balance Sheet has three main sections:
- Assets
- Liabilities
- Equity
Assets are what you own.
These can be further segregated into Current Assets, Fixed Assets, and Investments and Intangible Assets.
Liabilities are what you owe.
They can be segregated into Current Liabilities (due within one year), and long-term liabilities.
The difference between your assets (what you own) and your liabilities (what you owe) is your equity.
A simple way to envision this – imagine all you own is a house. You paid $300,000. This is your asset, what you own. You have a mortgage of $210,000. This is your liability, what you owe.
Your equity is simply the difference between the two, or $90,000 in this example.
You sell your house for $300,000 and pay off your mortgage of $210,000 and you pocket $90,000.
Simple!
Your Income Statement is made up of two main sections – revenue (the inflows into your business), and expenses (the outflows from your business).
The difference between the two is your Net Profit.
Recap
So, now we have a Big Picture emerging – by knowing these five main sections of these two financial statements.
By looking at the Balance Sheet, we can determine what we own (assets), what we owe (liabilities), and the difference between the two (equity).
In examining the Income Statement, we can see what revenues flowed into our business, and what expenses flowed out of our business, and lastly how much profit we made.
That is the Big Picture…
Now let us get more detailed…and talk about ratios…
Ratio Analysis Deepens the Story
By looking at ratios in your business, we can start to interpret the “story of your business.”
Ratios come from the main sections of your financial statements. They tell us specific details about your business that we cannot glean from just looking at the five main sections…
By understanding exactly what they mean we can determine the overall health of our business.
From there we can make decisions to improve it.
What are the main ratios we should be looking at for most businesses?
Liquidity Ratios
Liquidity Ratios provide an early warning for a business unable to meet its current liabilities when they come due.
A current liability is defined as something due within one year. These include things like wages payable, accounts payable, taxes payable, and loan payments.
A current liability is paid with a current asset. Current assets are either cash in the bank or things that will convert to cash quickly. For example, accounts receivable collected and inventory when sold.
The current ratio is simply your current assets divided by your current liabilities.
One rule of thumb is that a current ratio of 2:1 or greater is extremely healthy.
A 2:1 current ratio means that for every $1 in current liabilities you have $2 in current assets to pay them. It means you are liquid.
Another way to think about it is that by being liquid you have enough current assets to pay your current liabilities as they become due.
By having $2 for every $1 in current liabilities means you are well covered.
Now let us look at…
Profitability Ratios
Three important profitability ratios are:
- Gross profit margin
- Net profit margin
- Return on equity.
Gross Profit Margin
Gross profit margin is the amount of profit left over after deducting your direct costs of producing or purchasing your goods and services.
Gross profit is needed to pay for your operating overhead. It needs to be high enough to cover all your overhead plus a profit.
Every industry will have a different gross profit margin percentage that will be normal in that industry.
Things that can lower your gross profit margin to a dangerous level include:
- Sales discounting
- Inefficient production costs
- Venders for your purchases that are charging too much.
- Venders delivering goods with poor quality.
Every business must measure their Gross Profit Margin by product line. In this way, you can monitor which product lines are most profitable in terms of both sales volume and the gross margin percentage.
Things that can increase your Gross Profit Margin include:
- Price increases especially when there is no loss in sales volume.
- Outsourcing manufacturing especially to a low-cost jurisdiction.
- Eliminating quality issues in either production in house or from your venders.
Next, we will look at…
Net Profit Margin
Every business needs to have overhead to run. These are indirect costs that are usually fixed in nature.
Some examples of overhead include:
- Management salaries.
- Rent.
- Insurance.
- Office Supplies.
Your Gross Profit must be enough to cover all of these fixed overhead expenses plus your profit.
Ways to increase your net profit include:
- Turn fixed expenses (as much as possible) into variable expenses.
- Find venders who will give you the same result for less money.
- Outsource as much as you are able to low-cost jurisdictions.
One of the things that happens to all businesses over time is that the fixed costs creep upward. And they also can be sticky.
By “sticky” I mean when businesses enter into longer term contracts that bind them to certain requirements that may no longer be needed.
What can happen is that you incur a fixed cost that you needed in the past, and now no longer do.
By not frequently examining your vendor relationships and agreements you may find you have fixed costs that are no longer even being used.
These can include things as expensive as office leases (more people are now working from home for instance) or software subscriptions for former employees that were not cancelled.
Now we will examine…
Return on Equity
Return on equity is expressed as a percentage of how much the business is earning in relation to its owners’ equity.
It is calculated by dividing the Net Profit by the Shareholders Equity and then multiplying this by 100 to represent it as a percentage.
A higher percentage is of course better, and a measurement of the reward being earned for the shareholders’ investment risk.
In Summary
Looking only at the larger numbers in the five main areas of your financial statements – Assets, Liabilities, Equity, Revenues, and Expenses – can be difficult to see patterns.
By expressing them as ratios, often a percentage, and understanding what they mean you can start to guide your business better.
A great accountant is someone who will interpret the numbers for you. He or she is like your co-pilot and they can help you see things that are otherwise incomprehensible.
Next week I will talk about Activity Ratios and Leverage Ratios.
Thanks for reading….
