Episode E.016 Find Money Inside the Business

Author's Notes
We are introducing a new format to our Show Notes and Broadcasts. We received feedback our podcasts are too long (average 26 minutes). The shows have been restructured into 13 minute segments - each with a specific objective. Segment 1: What the show will cover and why it is important. Segment 2: What do you need to know to take action. Segment 3: How do you apply it and the tools available, and Segment 4: Tips and Insights from our experience. Thanx for the Feedback and keep it coming.

What are Today's Topics & Why is it Important?​
Given your current situation, there is not a better time to make "Getting Right" the priority. Our experience has proven that if you view the business as a bank and all you have to do is look - there is money to be found.

Today's Key Topics:

• Inventory
• Accounts Payable
• Accounts Receivable

We left off the list Cash Flow Management and the Reduction of Variable and Fixed Costs for brevity. We will cover those issues in another show.

Knowledge to Take Action

• Inventory: products - raw materials, wipi (work in process), and finished goods; services - available time for sale.
• Accounts Payable: money you owe suppliers for goods received that have not paid in full.
• Accounts Receivable: products and services delivered to customers that have not been paid in full.

What You Need to Do
The Get Right Plan
The following is hypothetical plan we produced for a client last year. It is to demonstrate what is possible if you look at the business as a bank and discover the money hidden in your operation.
Inventory 

• What are your current turns? Cost of Good Sold divided by Average Inventory.
• Cost of Goods Sold (COGS): measure of the production costs of the company over the year which includes cost of materials, labor costs directly related to goods produced or services delivered, and any fixed costs direct used for goods produced or services provided.
• Average Inventory (AI): the average inventory you carry in dollars per year. This approach factors in periods of high and low sales; total inventory for the year divided by 12.
• Example: COGS = $40,000; AI = $25,000. $40,000/$25,000 = 1.6 turns per year
• What are your day sales of inventory (DSI)? Measures how many days it takes to turn inventory into sales, DSI is also known as days inventory.
• Average Inventory divided by Cost of Goods Sold multiplied by days open.
• Example: AI = $25,000; COGS = $40,000, Days Open = 250. ($25,000/$40,000) X 250 = 156 days
• Opportunity: take inventory down to 30 days. That means you would reduce your average inventory from $25,000 to $4,900. 
• Get Right Budget for Inventory: $25,000 - $4,900 = $20,100 
• New Turns Per Year: 8.2

Accounts Payable

• Opportunity to negotiate new terms: eliminate all COD purchases; move 50% of your 30 day AP to 60 days.
• Get Right Budget: $40,000 X 50% = $20,000
• Opportunity to negotiate new terms: on the remaining $20,000 AP at 30 days into a 10% quick pay discount.
• Get Right Budget: $20,000 X 10% = $2,000
• Get Right Budget for AP: $20,000 + $2,000 = $22,000

Accounts Receivable

• Opportunity because of active followup from accounting personnel, shift 50% of 60 day AR to 30 days
• Get Right Budget: $10,000 X 50% = $5,000
• Opportunity factor the remaining AR, $35,000 X 95% = $33,250
• Get Right Budget for AR: $5,000 + $33,250 = $38,250

Total Get Right Budget for Inventory, Accounts Payable, Accounts Receivable; and we are just getting started. Wait until Volume Three and we attack variable costs.

• $20,100 (Inventory) + $22,000 (AP) + $38,250 (AR) = $80,350

This is what you can expect from Mastering the Numbers