No. 17 dealt with measuring and managing debtor days. This week’s challenge is controlling creditor days. Why? Instead of measuring what your business is owed, this ratio measures what it owes to others.
The ratio is straightforward:
Creditors x 365
Cost of Sales
Interpretation is less so. Again it can be used internally to compare changes between different accounting periods, looking for reasons for any changes. If creditor days are steadily increasing, for example, this will indicate that your cash balance is misleading, since it does not reflect payments due. There may be a reason such as the structure of incoming payments on a particular contract. If the reason is that there is no longer enough income to cover the expenditure, it is time to worry, and take action.
Again the bank or your accountant may have a feel for the usual ratio for your kind of business. If you are outside normal limits, you should consider taking action. This includes being a good payer – if you pay much quicker than the industry norm, you soak up cash.
The aim of using these measures is to gain a deeper understanding of how your business works, and of any changes that are taking place.
International Coaching Week runs from 20th to 26th May 2013. To celebrate, and to introduce more people to the benefits of coaching, we are offering a 4th month of coaching for nothing if you pay for 3 months coaching during the course of the week. Sorry, this is not available with any other offer.
Time is ticking, so call now for more information on 0121 698 2318, or contact us using the form below.
Having an accurate set of accounts is one thing, but being able to extract important information from them quickly is vital. Challenge No. 6 was credit management – how can you measure how well this is going without poring over lists of aged debtors for hours on end?
One of the common accounting ratios is “debtor days”. This is simply
Debtors x 365
This allows you to measure how many debtors you are carrying in proportion to your sales. A bald figure is not necessarily helpful – it will vary with the kind of business and with the particular business concerned. A supermarket is likely have a lower figure than a solicitors firm, for example.
The ratio comes into its own in making comparisons, either internally or externally. If the ratio improves compared to the same period last year, or to the last quarter, this may be a good sign. Some thought will be necessary as to the reasons. Externally, you can potentially compare your figure with others in the industry or your competitors. The figures may be available from public accounts, or your accountant or bank may have a feel for what is the ball park expectation.
Obviously, any measure is only useful if it leads you to make any necessary adjustments in your business.
For the month of May 2013, we have a member to member offer on the Black Country Chamber of Commerce website giving a discount to inexperienced business owners during their first 12 months of operation. The pre-discount price is only £90 per month for 1 hour of business coaching, together with some email and telephone support. For any business not within reasonable distance of our office, we can coach by telephone.
Because this is a fraction of our full rate, it is subject both to availability and to our discretion. But if you are running your first business without support, contact us now (form on the “About” page) to arrange a free discussion.
This one is very relevant at the moment – there was no Challenge last week because, yes, I was on holiday. And that means I went through the mad rush of clearing the desk before going, then coping with hundreds of emails when I got back. And it was worth it.
The difficulty for many is finding the time, or thinking that their business cannot survive if they are not physically present. In many cases the latter is true, and both are the product of indispensability syndrome. This can be real or psychological. The real kind arises because there is no-one else to cover for the business owner, and is particularly common in smaller businesses. This leads to a treadmill effect, which then means that the owner is even more in need of a holiday. What is does to family life is another issue.
The answer is to develop the business sufficiently that it has enough well-trained and competent staff to cope in your absence (which may equally be due to accident or illness). They need to be supported by well designed procedures so that the business functions without minute by minute management – but with a trigger by which the owner is contacted when really necessary. Building up gradually from a long weekend to a complete fortnight can create confidence in all concerned that the system will cope.
Psychological indispensability syndrome is more difficult to crack, at least for the solo entrepreneur. If they have strong colleagues, the problem can at least be pointed out, but realisation needs to come from within. Beyond that, the prescription is as above. However, carrying this through will be that much harder if the need to be needed has to be overcome.
Coaching can help, so if this is an issue you face, call us for a no obligation discussion on 0121 698 2318. You may engineer a happier summer.