BUSINESS Using Dashboard Reports better or worse by paying our bills on time (or not) and/or how much credit we extend and how promptly we get paid. Again, we need to be cognizant of our business cycle. If a significant portion of your business happens to be on a cash basis, this will help with your overall cash flow. If you aren’t familiar with the term cash flow, it basically means your cash coming in versus your cash going out and what’s leſt aſterward. A more com- prehensive definition also considers at least your A/R and A/P and anything else that will impact your cash. So, let’s begin by looking at A/R. Far too oſten, companies focus hard upon their collections but still manage to miss the boat. Why? Because they don’t make sure that invoices are generated immediately, or at least the closest day aſter when the service was provided, or the product shipped. What’s the point in compressing your A/R collections by two days while taking five days to generate your invoices, aſter the work has been done and/or product shipped? Review your processes and find ways to compress this billing cycle. It’s imperative to generate your invoices ASAP aſter the work has been done. This is an issue that typically will not appear on either your dashboard report or any other place, so you need some mechanism to measure this! When you invoice the customer for credit sales and have not yet been paid, accounts receivable (A/R) are created. Thus, your A/R represents what you might call “expected future cash.” Because you so thoroughly enjoyed your time spent in that peaceful Utopian all-cash meadow, it might come as a shock to know that customers don’t always pay their bills on time. No. I’m not making this up, and it can even get worse: Some customers don’t pay you at all. Ever! This is why accounting soſtware generates what is known as an A/R aging report. Such reports list how much you are owed and assign the invoices to time buckets (numbers of days outstanding) of typically 30, 60, 90 and 120+ days. Indeed, the older your A/R, the less likely you are to get paid. Even if you do, it’s more likely you’ll end up settling for some negotiated amount less than what you’re owed. To emphasize this point, business lines of credit are oſten secured by a com- pany’s A/R, but banks usually won’t permit any A/R over 60 days to be considered for this purpose. Again, you should in- clude a daily A/R balance in your dashboard report, but you also need one or more dedicated detailed A/R reports to man- age your collections. It’s vital to stay on top of your collections! If necessary, offer early-pay incentives. Next, let’s talk about when the shoe is on the other foot. When your suppliers extend credit to your company, you re- ceive a bill/invoice from that supplier for whatever goods or 18 KEYNOTES FEBRUARY 2021 services you purchased. Such bills/invoices represent short- term (in accounting speak, this means less than one year) debt you owe, and such unpaid bills/invoices are collectively known as accounts payable (A/P). Thus, your A/P essentially represents what you might call “a future demand on your cash.” No. We can’t just go back to that peaceful Utopian fan- tasy all-cash meadow again. (But, in case you’re wondering, word on the street is that the Hobbits got busted for operat- ing a crystal meth lab, the bunnies accepted a plea deal for testifying and the sheep were deported. Yes, I know, they seemed so nice!) So, moving along, just like your A/R aging, your accounting soſtware generates what is known as an A/P aging report. This report spells out how much you owe and assigns the bills/invoices to time buckets, typically 30, 60, 90 and 120+ days outstanding. As your company builds some history and establishes a track record, you will likely set up credit accounts with various sup- pliers, such as distributors or manufacturers. Such accounts usually offer standard payment terms, although specific bills/ invoices may have nontraditional terms because of a special deal or promotion. Ordinarily, you’ll want to pay the oldest bills/invoices first, but other factors may influence such de- cisions. In the real world, just like production scheduling, managing your A/R, A/P and cash is another juggling act for business owners or managers. Establish credibility and main- tain a good relationship with your key suppliers so that they’ll continue to work with you, especially when you encounter a rough economic patch where cash becomes extremely tight. Irrespective of whether you have 30, 60 or some other terms to pay your A/P, one thing to consider is when the clock starts running on your bills/invoices. Some companies use the invoice date, but others use the date the invoice was actually received. Obviously, the choice of system can make a difference, espe- cially if your supplier is snail mailing their invoices. Acutely aware of this, many companies prefer to deliver their invoices at point of sale or promptly send their invoices via email or fax. Have I mentioned that you need to get your invoices out immediately, if not sooner? If/when your cash becomes very tight, one of the levers you can pull is to delay paying some or all of your A/P. This is known as “dragging your payables.” Another lever that may be available is to use your line of credit, but far too oſten, such working capital credit facilities are already maxed out. Yes, you can also open up a credit account with another supplier, but be careful with this practice. No, we’re not going back to that Utopian meadow. Enough about the darn Hobbits and bun- nies… get over it! WWW.ALOA.ORG
