Connecting with your Finance team is an important part of running a successful business. It’s their job to keep your finances in check, but you need to understand what they tell you. Financial literacy training will help you understand the feedback your finance team gives so you can work together in driving your business forward. We’ve got 4 questions you can ask your finance team this week, just to show you’re a little more clued up than they thought you were. Q1: What’s our average debtor collection period? Slow collection of debtors plagues many a business. Some go bankrupt because of it. Ask this question to show you want to turn debtors into cash and stay on top of the stragglers.

• The collection period should be less than 30 days
• More than 60 is cause for alarm bells
• More than 90 is a warning to shake things up

Q2: What are we doing to improve it? Debtor collection is one area almost every business can improve. You can:

• Cut credit for bad customers
• Offer cash and early payment discounts
• Charge interest on overdue accounts
• Outsource collection to third parties

Ask this question to let them know that more needs to be done than simply wait for the cheques to arrive. Q3: How do we improve our working capital ratio? Working capital is your business’s heartbeat. Without it, you’re dead. Working capital ensures you have enough short term assets to cover your short term liabilities. A business can improve working capital through:

• Better debtor collection
• Clearing old inventory by discounting
• Arrange some form of finance

A working capital ratio between 1.5 and 2 is ideal. Any less signals liquidity problems, and any more than that signals some kind of inefficiency. Q4: What is our inventory turnover ratio? Is it in line with industry benchmarks? Do you know what happens to inventory that hangs around for too long?

• It disappears
• It gets lost, damaged, stolen or misplaced under a pile of dusty boxes
• It just becomes obsolete

A high turnover indicates inventory is being efficiently managed and is selling quickly. This leads to fewer funds tied up in stock and more funds available for other obligations. ‘Good’ turnover varies greatly between industries – obviously a car dealership will have a slower turnover than a bakery. It’s important to compare with industry benchmarks to ascertain whether action needs to be taken. Want to understand more about your business’s finance? Colour Accounting™ is our financial literacy course. Click here to secure your place. [traininglist slug=”colour-accounting-normal”]

]]>