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 | May 30, 2024 | Business Tips, Cash Flow, Selling Tips
What? Track only ONE Key Performance Indicator? That is like flying a jet plane with, say, a choice of fuel level, altitude, airspeed. Pick one, and good luck. Crazy, right?
A business is like a jet airplane in that to hit its target with accuracy it needs more than one Indicator to really fly. Likely about 8-12 Key Indicators.
I agree with that.
However, there may be one Super Key Performance Indicator that if you could discover it, it would be a kind of early warning siren for your business.
This early warning would wake you up to take immediate corrective action if it is off target or relax with a glass of wine if it is on target.
Let us take a look and explore this concept together…
Super Key Performance Indicator
Behind every business, in every industry there may be a kind of magic number. A Super Key Performance Indicator.
This number will act like an early warning sign of trouble brewing.
A Super Key Performance Indicator for an Airline
I read once that the CEO of British Airways looked daily at this Super KPI – flights leaving on time.
If flights did not leave on time, everything spilled out of control:
- Costs went up from the delay.
- Passengers would be irate and expect refunds.
- Passengers would need meal tickets and sometimes hotel costs covered.
- Employees may have to be paid overtime and booked in hotels with meals.
A flight not leaving on time does not arrive on time, adding more costs from the bottleneck.
You can imagine the snowball effect of one flight not leaving on time.
An Unusual Super Indicator for a Restaurant
Super Key Performance Indicators can be incredibly unique!
I heard of a restaurant owner who could roughly predict the number of guests he would get at his restaurant on Saturday from how busy Monday was.
Honestly, I have no idea how the two interrelate.
And that, in part, is the key.
An Accounting Firm Super KPI
For an accounting firm longing for long-term client retention, a Super KPI could be a simple one – the growth rate of sales combined with cash in the bank (cash in the bank of the clients, not the business).
Okay, okay I know that is two – sales growth and cash on hand.
Cash on hand (from sales growth) could indicate the following:
If the client’s cash is declining:
- Low cash causing stress paying bills including the accounting firms.
- Higher demands for the accounting firm to help them attain positive cash flow.
- Loss of the client if they go bankrupt.
On the other hand, high monthly cash flow means:
- A happy client eager to listen to your advice.
- A client who is growing and will likely expand their demand for more services from you.
A Super KPI for All Businesses
In the area of marketing, it will be relatively easy for a business to find a Super KPI…
To find your unique Super KPI in the marketing area do this – find the one activity that drives sales more than any other.
It could be phone calls, direct mail, events, or website contacts.
Find the activity that gives you the most sales.
To get more business, first track that activity and then increase the activity to grow your business.
Simple, right?
Lastly, keep examining new and innovative ways to market because your business tools might change. Phone calls that worked last year, might not now. Perhaps it is something online.
The key is to keep looking.
How to Find Your Super Key Performance Indicator?
A Super KPI will emerge for your business by you thinking deeply about and examining patterns.
To help you find the patterns ask yourself some questions:
- What one thing that we are doing as a business has the greatest impact on our business within the next 12 months?
- What one thing that we could do would have the greatest impact on our business results?
- What bottlenecks do we have?
- What is the single thing that drives our clients/customers crazy when we do not do it? (i.e. it could be on-time delivery, or what is delivered is not high-quality).
- What is our review score on Google?
- What strange pattern is there in our business (like Monday guests as an indicator for Friday guests!) that I have not seen yet?
- Ask your Team for patterns they may see that you do not.
Thank you for reading…
by MHolland | May 23, 2024 | Accounting Software, Accounts Payables, Business Tips, Cash Flow, Cloud-based Accounting
We live in a fast-paced digital world, and cheque writing has gone the way of the horse and buggy (sorry to all pen and paper lovers).
The fact is that paper cheques, sent in the mail, are significantly more insecure than paying and receiving money online. Physical cheques are stolen from mailboxes, acid washed, re-inscribed and cashed by the thief.
For our clients, we have been paying all their bills online for years. The service we use for this is called Plooto, and they are awesome!
Paying bills via wire transfer or Electronic Funds Transfer (EFT), using the big Canadian Chartered Banks is time consuming and expensive. And it is not automated. Well, okay, it is partially automated in the sense it is digital. It is just not synced to your accounting system. Plooto is.
Here are 7 reasons to make the switch from cheques and EFTs to Plooto….
Reason Number One – It is Fast
All of your bills in Xero (or QuickBooks Online) are synced to Plooto. The instant you log into Plooto, there are all your approved bills, ready to pay.
When you are an e-signer (like a cheque signer only online) you will receive an email showing you the bills that are ready to be e-signed.
You login directly by clicking a link in your email.
You will see each bill that is ready to pay, with the source document attached.
Think of it like this. It is like your bookkeeper has recorded all the bills, printed the physical cheques, and brought the cheques with source documents attached to the cheque. He or she places on your desk, and you sign away.
The difference is that you can be anywhere.
All of this processing is fast!
Reason Number Two – It Saves Time
Because Plooto processes are online and fast, it saves time…
Time is saved in a few ways:
- The lack of physical movement of bills and cheques from office to office.
- The fact that the payment is synced back to your accounting software and recorded as a payment against the bill being paid saves the time of the bookkeeper having to record each payment as in the old systems.
- You can have multiple approvers and the flow is all digital, online. Once you approve, if you have a secondary approver, the bills will instantly go to them to e-sign. This saves a lot of time.
- The source documents are all attached to each transaction, so you are no longer hunting around for the physical copies of bills.
- You can pay multiple bills at one time, which saves time.
Reason Number Three – Pay Bills From Anywhere
Your bookkeeping Team can be in Vancouver. Your headquarters could be in Toronto. No problem.
Everything flows online and is accessible on your browser and through a browser app on your phone.
You can be on holidays and ensure bills get paid on time.
First and second approvers no longer need to be in the same office. They can be separated by oceans!
Reason Number Four – Multi Person Approval Workflows
You can set up a complex Approval Matrix with bookkeepers setting up the bills which in turn go to, for instance, a Department Head.
From there it can be routed automatically to the e-signers. For payments under, say, $1,000 perhaps maybe only one signature is required. If it is greater than $1,000 then 2 e-signers.
You have the power with Plooto to set up as simple or complex a Matrix as you want or need.
Reason Number Five – It Avoids Errors
Errors are avoided as follows…
Once the bill is recorded, checked, and approved in your accounting software, the source document gets attached to each transaction in Xero or QuickBooks.
This source document is attached to each transaction in Plooto, so you can look one more time before paying.
Multiple approvers means more than one set of eyes on each transaction.
The payment is synced back to Xero or QuickBooks which avoids duplicate entries.
To summarize, recording data once only, having multiple approvers looking, and source documents attached for a final look all lead to error avoidance.
Reason Number Six- It is International
Plooto can easily and seamlessly pay vendors and contractors in over 50 countries.
You do not need to call your bank manager to assist with a wire transfer and all this entails.
We have made many international payments with Plooto, and we have encountered no errors in doing these transfers. It is like paying a local supplier.
Reason Number Seven – It is Secure
Plooto uses Multi-Factor Authentication to login to its platform. The money is transferred directly form your bank account into your supplier’s account.
By the way, if they do not want to give you their banking information, as long as they have online banking, you can just email them the transfer and they login to their bank and deposit the funds themselves.
Multiple approvers make it more secure because more eyes have been on each transaction.
There is no risk of physical interception of cheques.
Plooto has banking level security and encryption running in the background.
They started in Canada in 2015 and have been a reliable and trustworthy partner of ours for many years now.
Thanks 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…
