Five,Strategies,Strengthen,You business, insurance Five Strategies To Strengthen Your Company's Financi

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Too many businesses wait until a crisis occurs before they startto focus on improving their financial management. Often, by thattime, it can be too late. By setting aside an hour now toevaluate the strengths and weaknesses of your company's financialmanagement activities and systems you can save a lot of time andaggravation. It can also help increase your profits, and at theend of the day that is what it is all about. The following are five strategies that will help you start tobuild a strong financial foundation and build value in yourcompany.1. Set up a financial control systemThe first thing you need to start with is a control system sothat there is consistency in your process and procedures. Acontrol system is designed to prevent and detect errors in yourdaily activities. For example, is there is a standard way ofprocessing your receivables, payables and inventory? If thereare no standard guidelines to follow, there is probably nocontrol system. 2. Have daily access to your account informationMake sure that you can access your account information every day;it is invaluable to managing your cash effectively. With mostbanks providing internet access at a reasonable cost, there is noreason not to have instant access to account information. 3. Manage your cash componentsConcentrate on managing your three main cash components: accountsreceivable, accounts payable and inventory. Let's take a look at each component: Accounts ReceivableMake sure your credit and collection system is workingefficiently. Any excess investment in accounts receivableincreases the need to borrow more money to avoid a cash flowdeficit. That means that if you are carrying excess receivablesyou are probably carrying excess debt and you have a direct costof having to carry that extra debt in interest payments. Even ifyou finance the receivables through internal equity, there isstill an indirect cost; the opportunity cost of using that equityelsewhere which could include expanding your inventory toincrease sales, reducing debt or earning interest on cashbalances.Your accounts receivable collection period defines therelationship with the cash flow process. Every month you shouldbe calculating your collection period and comparing with previousperiods and relating those results to industry averages. Anymaterial differences should be investigated.Your credit policy can influence your cash flow and earnings.Longer credit terms can increase sales and earnings, but anydecision to offer more liberal terms requires an estimate of thetrade-off between the cost of the larger investment in accountsreceivable and the bottom-line benefits of a higher sales volume.Remember that increasing your credit terms will bring in lesscredit worthy customers which can increase your bad debt expense.You can, however, use price increases to offset more liberalcredit terms.When you develop a receivable policy, consider the following: .Check the financial health of customers before offeringthem credit. Consider obtaining cash on the first order. .Do not make your invoice terms too generous..Charge interest to customers who pay late..Give discounts for early payment..If you are offering discounts, the terms should beattractive enough to encourage customers to take the discount.This can also serve as an early warning signal; if a customerdoesn't take the discount, or all of a sudden stops taking thediscount, then you may want to investigate further beforeextending credit as it could be a sign of financial trouble. .Do not wait longer than 30 days for a late payment beforeyou take action; you need to minimize your company's exposure tobad credit. Put it into dollar terms, if you have a $1,000 baddebt write-off and a 10% profit margin, you need to generate anaddition $10,000 in sales just to make it back. InventoryFirst, keep in mind that because of carrying costs such aswarehousing and insurance it is more expensive to carry inventorythan to carry accounts receivable. That is, reducing aninvestment in inventory provides you a larger bottom-line benefitthan a comparable reduction in accounts receivable because youare also reducing the carrying costs.As with your receivables, it is important to complete a monthlyanalysis of average inventory held in days. Compare to previousmonths and industry averages and investigate any materialdifference or change. A periodic inventory count is a fundamental requirement; anyitems that are overstocked should be investigated.A sales forecast is vital, without it you lack the necessarymanagement information for inventory control. Your target inventory investment should equal your normalinvestment for core sales plus a built in safety stock (forexample if a re-order is delayed you want some extra stock onhand) plus some amount for any anticipated growth in sales. You can use the following equation to determine your economicordering quantity: SQRT (2SO/CP) whereSQRT = square rootS = anticipated annual unit salesO = fixed costs per orderC = annual inventory carrying cost, as a % of a products purchasepriceP = unit purchase price for productNote that the above equation attempts to minimize inventory costby answering the question of how much and how often you shouldorder inventory. It is not perfect; the equation does not takeinto account volume discounts and assumes that your demand isconstant. However it is a tool that can be used to help in yourdecision making process. The following are 10 questions you can use to review youinventory process:1.Do you have a sales forecast? Do you compare forecast toactual sales and adjust the next forecast accordingly?2.Do you know which items account for 80% of your sales?These items should be managed closely.3.How fast can you get inventory?4.How do you order inventory?5.How much inventory do you order? Do you order extra justto save a few extra cents?6.Do you know the cost of holding your inventory?7.Do you rely on just one or two suppliers?8.How frequently is inventory analyzed to determineobsolescence and makeup?9.Do you have a policy of determining what is obsoleteinventory and how and when to get rid of it?10.Do you have an inventory reporting system to provide thenecessary tracking information?Accounts PayableAlthough you want to stretch your payables as long as possible,much like you offer attractive discounts to your buyers youshould also take supplier discounts as often as possible if theterms are attractive enough.Make sure your payables are tracked on a regular basis - such asweekly - and that your payment system runs smoothly.As with receivables and inventory, complete a monthly analysis ofyour accounts payable and compare to previous periods andindustry averages. Any material difference or change should beinvestigated. Make sure vendors understand your company in case there is asituation where you need to stretch your payables. You need aplan to deal with those situations where you may have anunexpected spike in your payables. You should re-evaluate you vendors on a regular basis to makesure you are getting the best value. 4. BudgetIt is fundamental, you need to plan for growth and you need toforecast for problems. You need to prepare a budget. Besidescompleting a budget for expected sales, you should also completea budget for a disaster situation, like your sales are cut inhalf. The benefit is very straight forward; it forces you to askyourself how you will be able to keep the company running in sucha situation. It will also point to areas where you may be ableto save money right away and free up cash flow. It's likehaving a disaster plan; you only have to act on it when disasterstrikes, but it is much easier to concentrate when you do nothave a crisis at hand.5. Develop a strong relationship with your BankDevote attention to building relationships with your bank.Always keep them up to date on where your company stands. If youhit a difficult patch it is much easier to get your bank on boardif they understand your business. Contrary to opinion, banks donot necessarily jump ship as soon as you fall into trouble. Theyare willing to work with small business through tough times, andgaining their trust to do so is much easier the more confidencethey have in you and your company. They way to accomplish thisis to be transparent in your dealings and to give them timelyfinancial information.Use you bank as a resource for cash management. There areproducts available that can increase your cash flow, orarrangements that can be put in place to increase your interestreturns. But you still need to make sure they are costeffective. Article Tags: Five Strategies, Financial Management, Accounts Receivable, Cash Flow, Much Easier