Tag: business value

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Does Your Customer Data Support the Value of Your Receivables? | FundingGates blog

Does Your Customer Data Support the Value of Your Receivables? | FundingGates blog

Trade Accounts Receivable (AR) represents the credit a company extends to its business partners. AR is essentially an approach to financing customers’ business operations, using the supplier company as the lender rather than a bank or other source. Particularly when markets are slow-moving and cash availability is low, trade credit tends to be what keeps businesses in business. AR is a business asset (which explains why it shows up on the balance sheet), because it is something the business has that is of value. When the business needs to get a little of its own financing, should an approach using AR as the basis be a consideration? Is it even possible?

AR “financing” means that the business trade accounts receivable are the main consideration of the lender in providing financing, where the AR is either collateral for the loan or is a factor making the business eligible for the loan. There are many types of AR-based financing, and there are still more issues to think about before trying to use AR as a financing tool.

When it comes to other assets in the business, the information about them is probably pretty well-known. Physical assets in particular don’t leave a lot of question as to their value – at least in terms of what was paid for them and then depreciated over time. Other assets, like Accounts Receivable, are a bit more difficult to value. Realistically, the value of the AR may not actually BE the book value of the AR, because not all of that money may be able to be collected. Considering that companies fail or go bankrupt or experience other events which cause them to default on obligations, there is risk connected to the AR and, subsequently, a question of whether or not it makes sense to “leverage” that AR for immediate cash.

There is research out of the Columbia School of Business (among other sources) which discusses a condition called “information asymmetry”and how it may impact the business decision to use AR financing.

Read the rest of the article on FundingGates blog: Does Your Customer Data Support the Value of Your Receivables?.

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Knowing Enough to Run a Successful Business

Knowing Enough to Run a Successful Business

If you own and operate a business, you probably want to make it successful.  Granted, success comes in many flavors, and there are also “degrees” of success, where maybe you do okay but not as well as you’d like (or not as well as your local competitor).  Running a successful business, and crafting a business with sustainability and long-term value, takes information as well as know-how.   Remember that information = power and you want to be as powerful as possible when it comes to running your business.

While today’s information technologies, mobile devices, and “everything as a service” have the capability to deliver way too much information for the average business owner to make sense of, there are a few areas of the business where investing in a little insight and reporting can make a big difference in the level of understanding you have about the business.

Rather than making decisions based on guesses or gut, business owners should use actual historic data relating to these are key areas (and key performance indicators) to help predict sales and order volumes, estimate cash flows, and forecast profitability.

Getting Customers

The “customer lifecycle” does not start when someone buys from you, it starts when they become a potential customer (often referred to as a target).  Even before someone buys, your business may expend resources to expose your brand or product to them on websites, in advertisements, and through other marketing channels.  These marketing efforts will (hopefully) result in the generation of qualified leads for the business to sell to.  Unless the business understands the costs involved and the efficiency of the marketing and lead generation efforts, it cannot understand the actual cost of getting a new customer.

The next step in getting customers is turning a qualified lead into an actual paying customer.  The business will want to keep track of conversion of leads into customers, along with sales data including total sales, number of items sold, and how items were priced.  Powered by sales performance data, business owners can learn whether or not their lead qualification efforts are working, if their products are competitive, and if the pricing is in alignment with the industry.

Producing Work

When businesses operate, they essentially produce whatever work product their business model is designed to produce – whether it is a professional service, product, logistical support or whatever.  Every business produces some type of work product.  This is the operational aspect of the business, and business owners should want to know as much as possible about how well operations are running and how effective the operation is.   This isn’t just the cost of production, (the yield expected for a given investment in materials or equipment), it is also about the quality of the product (customer satisfaction) and the quality and value of the service behind it (customer retention).

Keeping Money

Money (more specifically, cash and the availability of it) is the metric that most small business owners tend to focus on.  It makes sense, too, given that most small businesses survive based on what they have in their bank accounts.   Then again, looking at the accounts receivable and payable won’t tell the entire story, either.  Business owners need to know how quickly their customers generally pay, and they need to know how much capacity or inventory they have before needing to buy or develop more.

The message underlying this entire discussion is that fact that you can’t analyze what you can’t quantify (no information = no power), so it is essential that systems be in place to capture information from the business and its activities.   Further, recognize that it takes some skill and experience – perhaps from your trusted accounting professional – to put the information together so that it makes sense and is useful.

Make Sense?

J
Measure, Manage and Succeed.  It’s all about knowing how to speak the language of finance

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An Educated Guess is Not a Crystal Ball – Forecasting the Future

An Educated Guess is Not a Crystal Ball – Forecasting the Future

If every business could peer into the future to see how they will perform, there wouldn’t be a need for historical data and performance benchmarking.  Unfortunately, nobody has a crystal ball, so it becomes necessary for business owners to plan for the future.  By making educated guesses with valuable information gleaned from the past, companies can establish the path they will take to growth and profitability.

Accounting professionals are great at producing accurate historical financial performance information.  The value in this historical data is only partially found in the periodic reports and financial statements generated.  The primary value, the insight delivered from this historical data, is the information it reveals about the business operation over time.  It is from this historical data that certain trends are identified, providing a basis for making the educated guesses necessary to learn how the business will look in the future.

Forecasting is very important for businesses, as it provides the framework for laying out your expectations for the business.  In essence, it is a way to (hopefully) predict what your business finances will look like in the future based on forecasted growth.  And, armed with the forecast, you can now more confidently build a reasonable plan to reach your stated business goals.  While there are myriad approaches to creating a business forecast, it makes sense to simplify the process and focus on the area you likely spend most of your time attending to: sales.  Use your sales goals and projections as the basis for establishing a forecast, setting realistic goals for the current year and for a few years after that.  Once you’ve forecast the new sales goals, you can more easily appreciate what it will take in personnel and other costs to support that growth.

Recognizing that the forecast is simply an educated guess, it is important to regularly compare actual performance to the forecast to see if the business is on the right path to reach the established goal.  If sales are not growing as projected, then the business may need to make adjustments in terms of personnel hiring and other plans to ensure that costs don’t outpace sales.  Without a path to follow, business owners will not necessarily know if the operation is “on track”, as there is no track to be on – there is nothing to measure success against.  Certainly, profitability is the goal, but it is a matter of degrees of success, and the business will not know whether it is being as successful and profitable as it might be.

Accounting professionals should help their clients create realistic forecasts, along with organizing the information and formulating a plan for the business owner to follow.  On an ongoing basis, the accounting professional’s involvement delivers continued value by helping the business owner recognize and respond to changes in the business, adjusting plans as necessary to keep the business on the right path.  And, no crystal ball is required.

Make Sense?

J

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Why is asset management important to a business?

Why is asset management important to a business?

Knowing how efficiently you manage and use business assets to drive revenues and generate earnings is essential to understanding how to increase business value.  While various dashboard reporting tools and solutions designed to monitor receivables, payables and cash flow are helpful in addressing daily decision-making needs, the question asked most frequently by business owners is actually one of overall business value and how to increase it.

chartBusiness value is generating sustainable cash flow.  If you run a highly efficient business, the more top-line growth you deliver, the more cash flow you enjoy.  For capital-intensive businesses (either through the need for capital equipment or working capital), growth can actually lower your cash flow and diminish your business value.   To understand which side of the equation your client resides, accounting professionals will often look at the return on total assets calculated over time, dividing the operating income for each period from the P&L by the appropriate period values of total assets from the balance sheet.  The resulting metric describes how efficiently assets are applied to creating earnings.

Understanding the return on total assets helps business owners understand whether or not the business has to spend more money in order to grow the same volume of earnings.  A higher number indicates the business uses its assets efficiently and effectively to drive revenue, while a lower number demonstrates a higher cost of growth.  Accountants and business advisers should be monitoring this metric for their clients, helping to identify which path to profitability and growth makes the most sense for that particular business.

The numbers will vary with different business types, so comparing client performance to others in the same industry can provide a great deal of strategic insight.  The “return trend” may also be benchmarked against the competition and peer businesses.  If the business is utilizing assets more efficiently than competitors, it can represent a significant business advantage.

Accounting professionals need to take a proactive approach to working with clients, and make use of the historical information they’ve developed to deliver business insight and intelligence to help them more profitably move forward.  While every business needs a tax return completed, they also need help understanding how to increase profitability and overall business value. Knowing that there are several ways a business can increase profitability, you can help your client understand that driving more sales and improving margins is only part of the story.  Businesses can also improve cash flow and their return on total assets metrics by decreasing the base of business assets, disposing of excess equipment, or simply by doing more with less.  By doing this, business owners will drive up their business value and create more options for their future.

Make Sense?
Joanie Mann Bunny FeetJ

Special thanks to Matt Ankrum of BodeTree for helping me get this right.  We don’t all have the years of experience or expertise to “just know” what the right answer is, and sometimes we know the data is telling us something new, but we’re not sure what it means or what to do about it.  BodeTree is the tool advisors and consultants can use to not only identify items that need more attention, but to understand what actions to take to make the necessary adjustment or improvement.