Wednesday, July 7, 2010

Create Your Working Capital Scorecard

During a troubled economic period many businesses struggle with cash flow management. Here are three tips to help manage the process:

1. Review your process flows for accounts receivable and accounts payable. The goal is to reduce receivables and extend payables where it makes sense to do so. Collection procedures and credit granting policies for A/R can reduce risk of uncollectible accounts, while automating recurring billing procedures and initiating progress billing procedures standardize cash receipts.

2. Take a look at your companies supply chain. You may be able to negotiate vendor terms and discounts, find new suppliers, or alternative parts that reduce overall costs. Reviewing fixed costs contracts, such as insurance premiums, can elicit savings in reduced rates, but also ensures proper coverage. As your business changes, the levels and amounts of insurance previously provided may no longer be needed. Consider auditing vendor agreements for conformity with terms of contracts and premiums are correctly invoiced. Initiating simple controls can prevent and detect costly errors.

3. Manage inventory levels. Divide products into low or high volume sellers then make decisions about which products to stock and which to order based on sales volume. Review sales projections weekly and report backlogs and/or missed promises for accurate production scheduling. Calculate your economic order quantity (EOQ) based on the total demand for the year, the purchase cost for each item, the fixed cost to place the order and the annual storage cost for each item.

To develop a “working capital scorecard” or to obtain more information on any of the components mentioned herein, contact Campanelli & Associates CPA.