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.
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No one is immune from the affects of climate change. Every industry is going to feel the impact of the changing environment, and in one everyone is contributing to the changes.
Let's look at the use of paper as an example:
On average each person uses 10,000 sheets of paper- that's 20 reams of paper or 1 and 1/5 of a tree per year. (conservatree.org) That doesn't seem to be that much, but for an office of ten, that's 12 trees a year. An office of 50 uses 60 trees. A large business company of 500? That's 600 trees a year. We don't have to keep doing the math to figure out that it starts adding up after awhile.
It's easy to say cut down the amount of paper you use, but how exactly do you do that? Finding the right marketing management software, mapping software, memory software, Microsoft accounting software, leaning manufacturing software (you get the picture) can cut down on paper consumption and make your business run faster. Not only that, but the right software can streamline your operations and improve efficiency by elimination paper forms. Financial management software allows you to submit and review forms electronically, getting rid of the hassle of having to dig through stacks of paper, or worse - losing the paper all together.
There are a lot of great software systems out there that allow you to create invoices, prepare estimates, issue purchase orders, review pricing, manage inventory, update data, and create and edit invoices electronically.
Finding the benchmark right software can do a lot for your business and help the environment. To find the right software for your company, check out the Software Selection Guide.
If you're ready to go completely paperless- check out 6 Tips For A 'Paperless' Office
photo credit: House of Sims
Fish can only be out of water for a few minutes before they stopping flopping around and start to dehydrate. The same holds true for a business without cash. Much like fish need water; your business needs a sea of cash to survive.
Businesses require a steady stream of cash moving in and out of the business in order to function from day to day (ie Cash flow).
Cashflow is used to measure your business' financial performance and is crucial in order to be solvent. Cash doesn't include your inventory, accounts receivable, or property. Even though all three of these can turn into cash, you more than likely can't trade excess inventory or the spare cubicle for goods or services.
Be careful not to confuse cash with profit. Why? Because profit is the money a business makes after accounting for all the expenses (In other words, it's what's left over after you have used the cash to pay the bills) Even if a business can forecast a profitable year, if there's no cash in the short term, the business is in trouble.
It's important that your business doesn't drowned in all the cash that's in the bank. Companies who pay attention to their cash flow statements know that if they have abundant cash on hand they are able to invest the cash back into the business in order to produce more profit.
Just last month, Business First reported that nearly half of business owners have been experiencing cash flow problems these past three months. While the state of the economy can bear some of the blame, the importance of cash flow is something that many business owners greatly underestimate.
So what exactly is cash flow and why is it so important? A company's cash flow is the revenue stream that changes a cash account, or simply, the movement of cash in and out of a business.
Cash flow management is crucial for a business's survival. Sufficient cash flow means that you have enough money on hand to pay creditors, employees, and other emergency bills that might pop up along the way. Having ample cash flow also gives you the opportunity to use the extra cash to expand your business. On the flip side, having little to no cash flow means that your company may be on the verge of bankruptcy.
Cash flow analysis can be classified into three separate areas- operational cash flow, investing cash flow and financing cash flow.
Operational cash flow comes from a company's internal business activities (sales, labor, and purchase of materials). Cash that's received from the sale of long-term assets, or spent on investments is called investing cash flow (purchasing capital). Financing cash is cash that comes from the issuance of debt and equity like loans, loan repayments, and ownership shares.
All three of these categories equal the net cash flows that are necessary to reconcile the cash balance.
Here's a quick example of a positive $550.00 cash flow.
A Cash flow Statement tells a company's story. It helps the owners not only reflect on the financial health, but also allows them to budget for the future. It truly is the lifeblood of every business.
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.
