Supplier vs. Partner?
Perform this exercise to build your business into muscular financial shape by the end of the year.
I’m not trying to be facetious with the title. I want to bring awareness to balance sheet management and its importance to your well being. You should set a cash balance (current account balance) objective for your business to achieve by the end of this year. It’s not always easy, but without an objective nothing is achieved. Better to have a target to aim for than nothing.
When cash is tight due to high accounts receivables and/or poorly planned investments in equipment, inventory or new expenditures, management’s approach to business can become exceptionally negative. Management will adopt a tendency to blame normal business operating expenses as a culprit, and a “we must cut back” or a “we can do without it” attitude settles in. These attitudes can direct the business down a path that has negative long-term results.
We must look at all reasons the company’s cash position is tight, and one task should be examining the following short balance-sheet checklist. It’s a worthwhile exercise.
1. Are the accounts receivable within the 20 percent of average monthly sales guideline (average monthly sales over the past six months)?
If not, then a strategic plan must be put into place immediately, and it usually involves a one-on-one discussion with certain accounts and their payment habits.
It’s normal not to enjoy this experience. However, the account(s) is/are affecting the well being of the company, its employees and management’s attitude, which also affects the quality and service levels to its clientele.
2. Are all inventory lines being reviewed and “cleaned” on a regular basis?
Stocking the right amount of parts for your normal clientele is critical. But tying up cash for items collecting dust on a shelf is poor business management – not someone else’s fault.
Review all lines to ensure the correct inventory is in the shop and stocked at the proper turn-earn index level. 300 divided by the gross profit (GP) percentage of the product line states the number of annual desired turns. So 300 divided by the 50 percent GP we earn on a line means that we want to turn the line a minimum of six times a year.
3. Equipment, facility and software upgrades are big expenses that can consume a lot of cash.
In the fast-paced automotive aftermarket field, additions must be properly planned. Trying to make quick decisions at the last minute because they’ve been put off can be disastrous to the business.
Establish a business-improvement budget every year and set aside the cash in a savings account on a daily, weekly or monthly basis. Try this trick: $10 per request order or invoice (amount of the invoice is irrelevant). It’s simple, yet effective, over time when you follow through with such discipline.
Your shop has to tailor the business to obtain specific results. Staying on top of industry issues and trend lines, coupled with business strategy and support is available with private coaching. However, only you know your clientele and what is required to wow them into long-term loyalty.
Keep it simple and start with the suggestions in this article. When you follow through, your business will be in a much healthier position by the end of the year. Now that is a true return on investment.