Posts in category: Advisory

This article explains that the Biden Administration has proposed a federal gas tax holiday in order to help US citizens with the current gasoline prices. Unfortunately, Patrick De Haan, head of petroleum analysis at GasBuddy, said “if a gas tax holiday coincides with rising wholesale fuel prices, consumers won‚Äôt see much of an impact at the pump because the tax move would be offset by the higher cost.” The national average for gas was over $5 but with the tax holiday in place, it is now sitting at a $4.94 national average. Hourly wage workers' pockets are hurting with gas prices being so high as “roughly 81% said higher gas prices have had a negative effect on their ability to pay for basic necessities.” In order to help save as much as possible, try tracking gas prices with an app for help finding the cheapest prices, pay with cash, carpool, and sign up for loyalty programs. For more information on how to save on fuel, click the link!

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The Cash Conversion Cycle, also known as the Net Operating Cycle, answers the question, “How many days does it take a company to pay for and generate cash from the sales of its inventory?” However, before an analysis like this can take place, it’s important to consider the company’s primary line of business.

If the company sells software, it's more challenging to measure performance because it generates revenue primarily on intellectual property — by developing computer code and licensing its use to clients. For online marketplaces, especially those that make the majority of their profits from third-party sellers that manage product sourcing, listing their inventory and shipping products on their own won't measure the online marketplace's inventory. Since these types of businesses don't act like a manufacturer that produces and sells products to other businesses or the general public, this type of analysis will be less helpful.

The formula for the Cash Conversion Cycle (CCC), is calculated as follows:

CCC = Days of Sales Outstanding (DSO) + Days of Inventory Outstanding (DIO) – Days of Payables Outstanding (DPO)

Days of Sales Outstanding, Defined

DSO is the average number of days it takes a company to collect payment once a sale has been completed. The beginning and ending Accounts Receivable figures from a fiscal year are added together and then divided by two. Then revenue from the income statement for the entire fiscal year must be divided by 365 days to get a daily average.

DSO = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2 = Revenue / 365 days

The fewer the days, the better; however, it can't be so fast that such tight payment terms push customers away.

Days of Inventory Outstanding, Defined

DIO is the average number of days a business keeps its inventory before it's purchased.

The beginning and ending inventories of a fiscal year are added together and divided by two to find an average. The resulting figure is then divided by the daily average of the cost of goods sold over a fiscal year, which is often 365 days.

DIO = (Beginning Inventory + Ending Inventory) / 2 = Cost of Goods Sold / 365 days

The lower the number, the faster inventory is sold. While there's nothing wrong with moving inventory quickly, there is the danger that orders might not be able to be fulfilled.

Defining the Operating Cycle

As the CFA Institute explains, putting DIO and DSO together constitutes the Operating Cycle. This is defined as the period of days that it takes a business to transform basic materials and/or goods into stock and obtain money from the completed transaction. When this number is small, it means the product is moving and customers have no issue making prompt payments.

Days of Payable Outstanding, Defined

Days of Payable Outstanding refers to the number of days a business takes to fulfill its debts to suppliers.

DPO = (Beginning Accounts Payable + Ending Accounts Payable) / 2 = Cost of Goods Sold / 365 days

Considerations for DPO include finding a balance between how long a business can take to pay their suppliers, but also not missing out on pre-payment discounts or being penalized with late fees, financing charges, etc.

Going Beyond the Results

Analyzing the Cash Conversion Cycle for the right type of company can provide great insight into that organization’s efficiency in regards to collecting billings, the length of time that inventory is up for sale, and the time it takes to become current with its own suppliers. Depending on the results of the CCC analysis, performing financial analyses can provide insight into not only how the company is performing financially, but why the company is performing financially.

 Sources

https://blogs.cfainstitute.org/insideinvesting/2013/05/21/a-look-at-the-cash-conversion-cycle/  

Cash flow awareness is vital in the day-to-day activities of a business. Keeping track of the inflows and outflows helps a company make better plans and decisions, such as choosing the right time to expand. Cash flow knowledge reveals where a business is spending money and can protect business relations, among other benefits. However, tracking cash flow is a challenge for many businesses.

To avoid business failure due to poor cash flow management, business owners are investing in software applications to help manage cash flow challenges. Modern technology enables access to these applications over the cloud, allowing small- and medium-sized businesses to benefit from them. These cash flow management tools help companies improve cash flow in various ways.

Remove Manual Paper Systems that Cost Time and Money

Using a cash flow automated system, it's possible to create and send invoices directly to clients through email. This saves on time that would otherwise be used for printing invoices, mailing them, making bank trips, and going through paperwork comparing details. It is also possible to automate recurring invoices, saving the time used to create and send invoices.

Makes it Easy for Clients to Pay

Paying invoices takes time if a client has to keep confirming the payment details. However, an automated invoice can contain a pay now link, which facilitates quick payments for applications that include access to online payment options.

Helps Avoid Data Entry Errors and Reduces Risks

There is no need to move from one platform to another to check details, manually enter details, verify figures, etc. This ensures fewer errors, such as those generated when copying details like bank information to a check or paying the wrong amount. Sorting out these errors takes time, hence delaying payments.

Cash Flow Forecast

The applications offer access to account insights in real-time using cloud-based software and mobile apps, making it possible to forecast when clients are likely to pay and when bills are due. Access to live data also means there is no more dealing with complicated spreadsheets and paper ledgers. This way, a business can plan its actions to ensure positive cash flow. For instance, a business can delay paying vendors and plan when best to pay bills without running out of standby cash.

Avoid Late Payments

Late payments can result in fines that will cost the business unnecessary losses. However, with software that automatically sends invoice reminders, it is possible to make timely payments.

Centralized Cash Flow System

All activities involving cash transactions are located in one system, offering the ability to see cash inflows and outflows at a glance. As a result, a business can streamline its accounts and monitor cash flow. Plus, since it includes real-time reporting, it’s easy to spot any red flags and solve problems that could adversely affect a business.

Leverage on Data Analytics

A centralized system collects data and stores it in one place. By deploying artificial intelligence technology that performs data analysis, a business can better forecast its cash flow. This also provides insight into how changes such as new products or price adjustments affect cash flow.

 Choosing a Cash Flow Tool

Cash flow automation enables a business to maintain a positive cash flow and have cash in its reserves to afford reinvesting in its operations, settling debts, and handling other operating costs. However, before investing in an automation tool, it’s recommended to analyze different tools to find the best fit for your business. Each tool is different and built to address various business problems.

Some features to look out for include integration with the existing accounting system, payments and invoicing, accepting a variety of payment methods, and security.

Besides getting the most suitable application, there are other considerations to establishing a healthy cash flow. Technology has its benefits, but it does not act as a cure for a poorly implemented system. For instance, if employees don’t know how to use new technology, its impact will be limited. Therefore, a business should establish a workflow process before implementing any new technology. 

This article explains how hiring family members can have their strengths and weaknesses. It is much easier to hire a family member rather than a stranger because each person can usually be reliable and dependent on the other. However, in order to keep a happy family, there are several guidelines that can keep the business running smoothly. Firstly, it is essential to develop clear job descriptions in order for each member to know exactly what their tasks are. Next, keeping the family schedule in order is necessary because families often have crazy schedules, so be sure to make working hours clear and even on paper. The article also recommends agreeing on pay, putting everything in writing so that it is clear, discussing where you're going to work (if working away from home), having an agreed-upon decision-making process, figuring out how to give feedback, and finally keeping family dynamics out of the workplace. To find out more information on how to improve your family business, click the link!

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This article discusses how running a small business can be a difficult task, especially when managing your most important asset, the employees. However, by following tips such as upgrading your onboarding checklist software, rewarding employees for their experience, running effective remote meetings, and inspiring through positivity, this task can be made easier. Every small business needs great employees in order to thrive, and this article outlines different strategies you can try. Be sure to check out this link for the full list and more details!

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This article discusses how many start-up businesses eventually fail, but by utilizing the eight strategies outlined in this link, you will give your start-up business the best chance possible at succeeding and even flourishing. For example, spending the necessary time developing a marketing strategy is essential to engaging your target audience. Additionally, strategies such as partnerships and employee engagement are also essential in any successful start-up business. Be sure to check out this link for more information and the full list of strategies!

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In this article, a survey was conducted by Oracle NetSuite to get insights from numerous executives about the importance of each role and their communications skills. The survey “polled small and midsize company leadership in four categories: CFOs, nonfinance executives (other members of the C-suite), finance managers, and nonfinance managers.” The survey showed that the finance chiefs' proficiency in understanding the business was marked at a 72 on a 0-100 scale. However, CFOs believe their communication skills are better than other executives think. “Their rating on the 0-to-100 scale for communicating with employees and stakeholders was 73; other executives gave finance leaders a rating of 59.” The survey also found that CFOs are more interested in cutting costs to mitigate inflation than those in other roles are. To learn more about the results of the survey, click the link!

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This article explains how shoplifters are stealing thousands of dollars from big and small retailers, and how the smaller retailers are handling the situation. Derek Friedman, a small business owner, says that since 2019 shoplifting has been a big financial issue with losses totaling over $200,000. Friedman also said he does not turn in all the claims to his insurance for fears of being dropped. Friedman has recently implanted a 1% crime-spike fee to help offset his losses at four of his hardest-hit Denver stores. Another small business owner, Caroline Cho, has been fighting off shoplifters at Sneaker City, which has been in her family for three decades. Her solution, for the time being, was to let customers only try on one shoe at a time. Check out the original article for more suggestions.  

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This link offers a comprehensive breakdown of the small business industry as it stands in 2022. For example, graphs displaying emerging trends, the effect of the pandemic, and hiring numbers are all included. Small businesses are often viewed as the lifeline of America, and these numbers back up that conclusion. No matter the current state of your business, being educated on trends included in this article can prove beneficial in the long run. Be sure to check out this link for the full list, more details, and educational graphs!

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According to the U.S. Small Business Administration and Project Equality, 60 percent of business owners plan to cash out of the business in the next 10 years. For the baby boomer generation, it's especially important as they contemplate retirement, with this generation reportedly owning 2.3 million businesses. When it comes to getting a business ready for sale, there are many components to review and get organized before looking for prospective buyers.

The first thing owners looking to sell their business are often asked is why they're selling. A sale may occur for many reasons – voluntary or not. Some people are looking to retire, while others might be looking to exit their business because things soured with partners. These are just some of the reasons why business owners or partners want to sell their business or stake in a company. Entrepreneur magazine says there are “three ways to leave a business – sell it, merge it or close it.”

According to Entrepreneur magazine, there are many considerations for business owners when they are contemplating selling. For profitable companies, it's more often due to choosing to sell, but not always. When there's the desire to sell a business, if the owners can show potential purchasers some or all of the following, chances are it will sell sooner than later and for a fair price: growing income, profitability, and a customer base, along with a business plan and product/services with long-term potential.

Another consideration is the timing of the sale. Ideally, getting the business' house in order will benefit both the seller and the buyer. With this in mind, it's important to have a few backup buyers in case the first deal falls through. One reason a deal may fall through is that the buyer didn't qualify for financing before the sales process got serious. This planning can give the business owner and potential buyers time to review, audit, and organize financial records; review and determine the business structure; and determine and analyze the business' customer base. This review and organization will help the new buyer maintain business continuity if they decide to purchase the business.

The next step is to get the proper documents in order. Organize the cash flow statement, balance sheet, and income statements, along with tax returns from the past few years. It's important to inventory all equipment, intellectual property, trade secrets, etc. to see what can be sold and transferred and to verify the current market value of each. Taking stock of both sales records and suppliers—and getting contact information for both—will help make a sale more likely. Depending on if the information is proprietary or not, it's important to have this ready to share, under confidentiality, with potential buyers. An operating manual and a general overview of the business are also necessary in order to show the company's presence clean and repaired.

Another consideration is how business assets that aren't so easy to touch will be valued. According to the American Bar Association, goodwill is an intangible asset, such as reputation, along with intellectual property like a trademark. The New York State Society of CPAs' (NYSSCPA) publication, The CPA Journal, reports that goodwill has an indefinite life, and one way to see if it meets the test of being goodwill is if it “is inseparable from the business.”

Another consideration when selling a business is to see its recent cash flow and to calculate it properly for potential buyers. According to the NYSSCPA and the Statement of Financial Accounting Standards (SAFS) 95, cash flow from operating activities (CFO), per the SFAS 95’s statement of cash flow (SCF), is calculated by starting with the net loss or income and then factoring in differences in working capital and non-cash sales.

Your business’s CFO shows how much it earns from its operating activities, as the name implies. It's important to see how this figure differs from investing or financing operations that may be ancillary to the company's irregular financials. Once this information is known, it gives potential buyers an accurate assessment of the company they are considering buying to see if they're comfortable with the existing business. Showing a business that's doing well can help attract buyers at a fair price.

While each business is different and the reasons for exiting it vary, understanding what potential buyers are looking for can increase the chances of a fast sale at a fair price for both seller and buyer.

Sources

https://www.score.org/blog/how-profitably-exit-your-online-business

http://archives.cpajournal.com/2002/0102/features/f013602.htm

https://www.entrepreneur.com/encyclopedia/selling-your-business

https://www.americanbar.org/content/dam/aba-cms-dotorg/products/inv/book/213938/5070556_SamCh.pdf

https://www.cpajournal.com/2019/11/27/the-challenge-of-accounting-for-goodwill/  

http://archives.cpajournal.com/old/14152806.htm

https://www.sba.gov/blog/7-tax-strategies-consider-when-selling-business