If you're frustrated with the way inventory is (or perhaps isn't) being managed, there's a very good chance that you are not alone.
Inventory management is something that we discuss quite a bit on the DataCraft Blog (check out other inventory posts here) because we know it's a common issue among organizations, regardless of their industry.
We'd like to take some time to offer a few white papers that have inventory solutions for inventory accuracy.
Demand Planner
Businesses, regardless of their size or specialization, need to estimate and monitor demand for their goods and services in order to efficiently manage their operations. Reducing uncertainty of demand can significantly help businesses keep inventory and operating costs low while improving customer satisfaction. Download the Demand Planner white paper
Guide to Inventory Basics
Having problems with inventory accuracy? Implementing technologies such as bar coding systems, RFID, and pick-to-light are often assumed to be the solutions to inaccurate inventories. Whether you are planning on implementing additional systems or not you should consider taking care of the basics first.
Download the Inventory Basics white paper
Inventory Turnover Ratio
Inventory management is all about finding the right balance. Every firm has to maintain a certain level of inventory of finished goods so as to be able to meet the requirements of the business.
Download the Inventory Turnover Ratio white paper
Don't let inventory inaccuracy drive you crazy, learn how effective inventory management can increase productivity.
Your monthly business financial statements provide information about previous months' activities, but even if the statements look good, you can still bet more out of them.
Many business owners rely on monthly financial statements plus monthly financial ratios. Ratios can be prepared from information already in your accounting software. Following are tools for measuring particular aspects of your business:
Liquidity:
- Current ratio - current assets over current liabilities.
- Receivables turnover - how quickly customers pay.
- Inventory turnover - how long your inventory sits.
Profitability:
- Profit margin - profit generated by sales.
- Asset turnover - sales generated by assets.
- Return on assets - profit generated by assets.
Solvency:
- Debt to total assets - percent of assets owned by creditors.
- Interest coverage ratio - ability to pay interest.
- Cash debt coverage ratio - ability to pay long-term debt.
Program your accounting system to produce key accounting ratios, review them monthly and get new insight on your business.
Managing inventory proves to be a challenging task for many managers and requires knowledge of inventory accounting basics. While the level of inventory varies from business to business, a reliable way to tell your inventory turnover rate is to utilize inventory turnover calculation measures.
The inventory turnover ratio tells you how liquid your inventory is- or how quickly your inventory can be converted into cash.
This ratio measures the number of times (on average) that your inventory is sold during a given period. It also measures how quickly your inventory can be converted into cash.
The inventory turnover ratio is calculated one of two ways. The most common way to calculate the ratio is:
The second and more accurate way to calculate the inventory turnover ratio is:
The second calculation is more accurate because "cost of goods sold" reflects your inventory's book value, and by averaging the inventory, you can reduce seasonal factors that influence the flow of inventory.
Generally, a high inventory turnover ratio means that your products are selling well. But before you get too excited about a high ratio, you need to compare it to the industry standards. If your ratio is higher than other companies in your industry, it could mean that your inventory management systems are ineffective.
Download "Inventory Turnover Ratio" white paper
Yes, knowing the entire financial health of your business is great, but there are times when all you want to know is your company's short term liquidity, and for that the quick ratio or acid-test ratio is where to look.
Here's what it looks like:
The quick ratio will tell you if your company is able to pay its short-term bills using your most liquid assets (cash, money in bank accounts, money market mutual funds, and US Treasury bills)
It's like the current ratio in the sense that it measures your ability to pay short-term debts, but it's more conservative of a measurement because it takes out inventory from your current assets. The inventory is subtracted from the current assets because some businesses can't quickly turn their inventory into cash. The current ratio can sometimes overestimate a company's ability to pay its short-term bills.
For example, if current assets equal $15,000 current inventory equals $6,000 and current liabilities equal $3,000, then quick ratio amounts to: ($15,000 - $6,000)/$3,000 = 3. Since we subtracted current inventory, it means that for every dollar of current liabilities there are three dollars of easily convertible assets.
Ideally, your company's quick ratio should be 1:1. The higher the ratio, the stronger your company is.
Learn more about inventory ratios. Download the Inventory Turnover Ratio white paper.
When you read the phrase "stress test", what thoughts pop into your head? I'll go ahead and assume that they aren't very positive. Most people think that banks and businesses only undergo stress testing when they are on the brink of disaster, but stress test shouldn't be a last resort of your financial plan. Stress testing your business investment keeps you competitive by allowing you to be proactive.
The economy has changed the way we do business and the speed in which we need to adapt. Stress test can be used as financial indicators that allow you to prepare for the worst-case scenarios that your business can come across. It helps to cover the "what ifs" of running a business:
- "What if" our biggest customer goes out of business?
- "What if" customers start demanding lower prices? Can you meet them?
- "What if" customers start taking longer to pay you?
- "What if" sales or production levels drop?
Stress testing your business has its benefits. It allows your business to be more adaptable to changes by providing the financial data you need to make quick and accurate changes to your business. Stress tests also help you formulate plans that address the "what ifs" giving you leverage when dealing with stakeholders and bankers, not to mention making you a stronger competitor.
In an article on CNNMoney.com, SBA chief Karen Mills said, "it is the small businesses that are going to drive the economy and the recovery.... We're the popular kids at the dance."
While some business owners are feeling ignored by the stimulus package offered by the government, others are feeling a lot of love from the "people's stimulus package."
Buy local programs have been popular in some areas for a while but since the recession, they've been gaining momentum all over the country. From Portland, Maine to Seattle, people are really beginning to rally behind grass root efforts.
Big changes come from small steps. According to the American Independent Business Alliance (AMIBA), each dollar spent at a local business generates three times more money back into the local economy compared to a dollar spent at a chain store- that means more tax revenue and lower taxes.CNNMoney.com reported that business owners in New England are taking on the "10% Shift" to show consumers that just by spending 10% of your spending on local businesses can have a noticeable impact.
But is it actually working? Yeah. According to a survey of 1,100 retailers by Institute for Local Self-Reliance, businesses that participated in a grass roots campaign only saw a 3.2% average drop of sales, compared to 5.6% by companies who didn't participate.
Bigger corporations are starting to notice. Even Wal-Mart has started to hang "Local" banners over produce aisles to entice shoppers. Before we get wrapped up in all of the numbers, let's not forget that local campaigns are also good for the environment. Local businesses take up less land, carry more locally made products and are closer to residents, reducing traffic and pollutants.
Visit AMIBA.net to see what communities around you are adopting buy local campaigns, and how to get started with one of your own.
In the world of accounting, ratios give and invaluable amount of information about your company and it's fiscal well being. Accountants use financial ratio analysis on a regular basis. These analyses help to evaluate the financial performance by comparing financial ratios of a business over various periods of time to other businesses in the same industry.
In his book Financial Analysis Tools and Techniques , financial expert Erich A. Helfert defines ratios analysis as
"the use of a variety of ratios in analyzing the financial performance and condition of a business from various viewpoints such as managers, owners, and creditors.
Get out your financial calculator.
There are three different types of ratios:
Liquidity
Profitability
Solvency
Liquidity
Liquidity ratios measure your business short-term ability to pay bills as they are due and let you know if you have the cash to cover and unexpected expenses. Liquidity ratios compare your most liquid assets (assets that are easily turned into cash) with your short-term liabilities. In general, the greater the ratio of liquid assets to short-term liabilities, the better off your company is. These ratios let you know that your company can pay debts that are owed and still continue to operate normally.
Current Ratios
Acid Test Ratios
Current Cash Debt Coverage
Receivables Turnover
Inventory Turnover
Profitability
Profitability ratios measure the operating success of your company for a specific period of time. They give you a better understanding of how well your company made use of its resources to generate profit.
Profitability Ratios
Profit Margin
Cash Return on sales
Asset Turnover
Return on Assets
Return of Equity
Solvency
Solvency ratios measure how well your business can survive over a long period of time by measuring your income after taxes. Solvency ratios take a look at your past financial statement analysis and let you know if your company can continue to pay its debts now and in the future by looking at your income after taxes. A ratio that is higher that 20% means that your business is financially healthy. The lower your ratio, the greater chance your company will default on its debt obligations.
Solvency Ratios
Debt to Asset
Times Interest Earned
Cash Debt Coverage
All of these ratios, liquidity, profitability, and solvency alike can provide you with useful financial information about your company. If you can get so much information from just looking at one type of ratio, imagine the invaluable knowledge you can gain to keep everything on track and guide your company to success.
Business owners really know how to provide quality products and services. But when it comes to simple accounting basics that can make an impact on the success of their business, some business owners are left in the dust.
Being a business owner isn't for everyone, in fact, most businesses don't make it through their first year. People who don't care to learn all aspects of owning a business especially accounting- probably didn't care about running a successful company in the first place. If you agree with any of the following, you'll probably find yourself in the same category as them.
1. You don't care if your business is profitable.
You should only bother knowing the simple accounting if you care about the health of your company. Accounting provides structure to help business owners keep track of whether or not their business has made any money over time and where that money is coming from. Knowing the nuts and bolts will tell you how profitable your business is by keeping track of how much money is going out and coming in.
2. You don't care about what others think.
As the business owner, you're not the only one who cares if your company is making any money. Banks and investors are very interested in knowing how well your business is doing financially. Banks will look at your business from a fiscal standpoint to determine whether or not they should loan your company money. More importantly, they want to be sure that if they give you a loan, you will be able to pay it back. Investors will also want to know if your company is a solid investment and a financial statement will tell them not only if, but how much they should invest into your company. The better you understand the ins and outs of your company's financial state, the more likely the bankers and investors will give your business the money that it needs.
3. You aren't concerned about employee theft; "they're like family."
This isn't to say that you can never trust your employees - there is no doubt that many employees are hard working and honest - but keeping tabs on your financial accounts can help you keep track of where your money is going. According to Score.org expense reports, payroll, purchasing, and suspense accounts are just a few of the places that disloyal employees are most likely to skim a little off the top. For a complete list of areas where employee fraud is most prevalent and what you can do as an employer to prevent employee theft, read the rest of the article.
4. You like selling products that lose money - you'll "make it up on volume"
Thinking about reducing prices to sell more products? Think again. While it may seem like it might make sense to slash prices to move more product, you are more than likely loosing out. Reducing prices reduces your gross profit margin and create more effort for your company to break even. Then again, if you knew accounting 101, you probably already knew that.
5. Cash flow isn't important to you
Your Cash Flow Statement gives you a snapshot of your company's short-term financial health. Knowing your company's cashflow is crucial, it will help you to determine if you have enough money on hand to pay employees and creditors on time. Companies who pay attention to their cashflow analysis know that if they have abundant cash on hand are able to invest the cash back into the business in order to produce more profit.
6. You don't really need to know if your customers have paid you yet
You don't care your customers don't pay their bills right? Of course you do! If you don't keep track of who has and hasn't paid you, how are you supposed to collect?
7. The IRS doesn't care if you've made your payroll tax deposits
Payroll taxes are the responsibility of every employer. Business' payroll tax responsibility consists of not only the taxes required to be withheld from employees' wages -Social Security tax, Medicare tax and federal income tax- but also that the employer's match their share of Social Security and Medicare taxes. Businesses that don't make payroll deposits can face some major penalties, including jail time.
8. Your suppliers never call you to collect their money
Just like you want to make sure that your customers pay you, the same holds true for your vendors. Keeping track of your invoices will help you stay up-to-date with liabilities and due dates for bills.
9. Your employees donate their time and don't expect to get paid
While satisfaction of a job well done is crucial for your employees to be happy and remain with your company, so is a paycheck. Not very many people can afford to volunteer 40 hours of their week. Knowing the basics, like cash flow, lets you make sure that you have enough money to pay your employees for all of their work.
10. Accounting is too difficult to learn anyway.
You don't need to be a mathlete to have a working knowledge of accounting. Chances are that if you're smart enough to learn how to run a company, you're smart enough to learn the fundamentals of accounting. Monica has put together an easy to understand course, Basic Accounting Structure that helps to explain the makeup of accounting, including the different kinds of accounts and basic financial statements that your business uses everyday.
Hopefully you don't find yourself agreeing with any of the reasons above, but if for some strange reason you might, then don't bother to learn anything about accounting; hire a mathlete to take care of all of your finances. But then again if you don't care about your money, you probably don't have enough to hire someone who does.
Photo credit: Carol Ester
