Take-away indicators for investors and owners
Is it possible to turn bookkeeping from a mandatory, exceedingly time consuming and extremely complicated task into an activity that is simply beneficial to your business? Thanks to Accounting Software, bookkeeping is becoming increasingly interesting for companies for reasons beyond the fulfilment of legal requirements. Nowadays, software like Odoo allows users to speed up accounting procedures and to invest time on gaining more insights from these on reports.
For example, you can use the data collected for and resulting from your balance sheet and profit and loss statement to obtain key information on your business and your competitors. What if with a little extra reporting effort you could get insights that will help your company’s strategy and are a great basis for your future business plan?
Here are three key reports that are definitely worth investing some time on.
Cash Conversion Cycle (CCC): assets management
Cash, cash, cash. The wise manager understands how working capital tied to assets is less profitable than fast-moving working capital.
The Cash Conversion Cycle (CCC) displays the fluctuation of your bank accounts and, very simply put, it explains where your money comes from and where it’s going. It will provide you with information on whether a company is efficiently managing their accounts receivable and inventory.
This key indicator is calculated in days as it's all about time: how long it takes for a company to collect on sales and how long it takes for a company to turn over inventory. If the cycle (or the time span) is quick, it indicates healthy management of cash as a key asset.
This report might be mandatory in certain countries (eg. USA).
The CCC adds information about your cash flow to the numbers available on your balance sheet and your profit and loss (P&L) statement. Through this report, a company can quickly identify imbalances and defects and adjust the way in which the asset is managed.
Aged Balance of Payment: credits, debts and time
The age of credits and debits matters. In this case, age refers to the time span in which credits or debits are paid out. The idea behind this report is helping the company to have a clearer overview of debits and credits and their priorities.
But why would you want to invest time in yet another report? What are the benefits?
Well, actually we're talking about two reports in one: the aged payable report and the aged receivable report. Two reports that give much more condensed information than the balance sheet.
The aged payable report helps you keep a close eye on what you owe your suppliers and vendors. Through this report you will have a clear, rational view that will allow you to take decisions on the management of debts - should you pay big vendors first or those with longer outstanding debts?
As for the aged receivable report, a clean view of what customers owe you can be useful in more than one way. An interesting example is follow-up. Imagine you have little time and lots of customers to get in touch with – you surely want to use your limited time in the most effective way so that the time you spend chasing will bring in as much money as possible. This report allows you to maximize your follow-up routine: select whether you want to prioritize customers with big outstanding payments, or customers whose debts are unpaid for longer.
Remember that in business a healthy relationship between time and money is at the basis of everything.
Free Cash Flow (FCF): pursue shareholder value
As mentioned above, cash is king. No cash no dash - no acquisitions, no paying dividends, no new products development, no debt reduction, no growth. Cash in the bank is what a company wants. This is why FCF is a key indicator: it shows the cash that a company is capable of creating once the money necessary to sustain or increase its asset base has been disbursed.
Faking cash flow is not so easy, which is why many investors consider the FCF provides a better landscape view of a company’s capability to generate cash and profits. And investors love a company with money in the bank. Is the company’s free cash flow on the rise? This is unmistakably a good sign; the business is healthy and does a good job setting the ground for future growth and investments. If the FCF is low or negative, trouble might be on the horizon. Sustainable growth might not be achieved and it's likely that debts will ensue.
But is a negative cash flow always a bad thing?
The answer is a resounding NO.
Think of when you buy a house: it's likely that you'll invest most of your bank account’s funds in that enterprise. Does this mean you're broke? Not really: it means you have invested that money and you own the house. Your cash has simply tied up in an asset. In the same way, negative free cash flow is not necessarily a bad sign. In case you're analyzing another company’s situation, you might want to investigate whether they're making large investments that could justify the lack of cash. Obviously, should these investments pay off, the negative FCF should be seen in the light of an aggressive growth strategy, thus balancing the momentary cash depression.
BONUS! Executive Summary: all in one sheet
Another report? More investigation, calculations, and all that goes with it? Yes. And here is why.
Most professional investors see thousands of plans per year. They usually only look at the financial projections and the executive summary before ruling out a company.Mike Coleman, president of The Startup Garage
The executive summary helps companies to have a global view of all indicators allowing them to evaluate the health of the business. This is really a report based on the needs of the company, and the indicators should be chosen accordingly. For example, you might be interested in finding out the average number of days necessary to receive payment for an invoice.
Where does the information come from? This is the part where I give you some good news:you already have all of the information. The executive summary draws information from other sheets and provides each number and each indicator in context. It's really about maximizing what you know, so that each cipher is not standalone data floating around, but part of a framework that will help management to have a full, clear understanding of the whole business.
Once your executive summary is ready, drafting the company’s business plan is going to be so much easier. You will know all about weaknesses and strengths and the knowledge you can acquire by analyzing competitors’ reports will tell you all you need to know about threats and opportunities.
O(do)o it with us!
All these indicators can be manually obtained through the Odoo Accounting Software.
What are your views on reports? Do you only stick to mandatory reporting or do you prefer to go the extra mile and obtain indepth information about your business?
Let us know in the comments before you go make your business shine!
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