A Good Accounting Department – The Fortune Tellers

What does your future hold? Will cash flow increase? Will you make more money?

Fortune Tellers

I’ve never seen a crystal ball in an accountant’s office. Yet, accountants are very good fortune tellers….because they have the information. They understand the past, can measure and report on the present, and know what’s coming in the future.

Here are three ways that your accountants can help you predict your future.

The accounting department can summarize and quantify your sales prospects based on your historical conversion rates from prospect to customer. For example, if you have quotes outstanding of $3,000,000 and you historically convert one-third of your quotes, then your future orders will be about $1,000,000. Yes, this is an estimate, and you should continually strive to increase your conversion ratio. However, this gives you an estimate of your future pipeline.

Your sales department has closed sales that have not yet been delivered. These are in your production queue. You can estimate your time to delivery by dividing your sales orders, say $3,200,000 by your production rate of $400,000 per week, for example. Therefore, you have eight weeks of work in the queue.

The third way your accounting department can predict the future is by predicting your cash flow. Internally generated cash from profitable sales is the cheapest and best source of fuel for your future growth. If your accounts receivable are at $2,800,000 (or about seven weeks of production, or about 49 ‘days in receivable’), then you will receive $400,000 per week (assuming you invoice when you deliver), or in monthly lumps of $1.6 million if you only issue invoices once per month. Accepting (or demanding) electronic payment, issuing electronic invoices and offering discounts for rapid payment will all increase your cash flow velocity.

Looking at the above example, your future revenues will be about $1,600,000 per month, based on $400,000 per week. You can increase your revenues by increasing your production speed, working overtime, invoicing quickly, invoicing for materials when they arrive in your shop, and invoicing immediately for fabrication upon completion instead of waiting to deliver to your customers. You need agreements with your customers for these terms. These are powerful ways to help you increase sales…and get paid faster.

Improving The Future

If you can increase your production rates and invoicing rates by a total of 25% (seems high, but it’s definitely achievable for many companies and departments), that will have an immediate and positive impact on your monthly financial statements by increasing monthly revenues from $1.6 million to $2.0 million, increasing profits by the revenue increase less cost of sales (materials, direct labour) and, most importantly, increasing the value of your business based on annualized EBITA (earnings before interest, taxes, amortization) multiple.

Here’s the math. Annually, revenues would increase from $19.2 million to $24 million. If we assume you have a 70% cost of sales, and general and administrative expenses remain constant, then your EBITA would increase by $1.44 million (30% x ($24m-$19.2m)) and your business value, assuming a five times multiple, would increase by $7.2 million (5 x $1.44m). Yes, that’s right, $7.2 million! That’s $7.2 million of value in a company with annual sales of $24 million. A conservative approach using half the growth would still drive $3.6 million of value. That’s definitely worth exploring!

Most businesses are sitting on hidden profits. The fastest way to increase your profits and your business value is to accelerate how quickly you produce your goods and services and how fast you invoice your customers.

You can only improve your future by looking ahead. A good accounting department will help you analyze the past, keep control of the present and convert the future into profits, cash and wealth. Accountants can help you create and distribute important information to the entire management team to keep everyone focused on profitable growth.

Tough Questions

Is your accounting department looking ahead, looking down or looking over their shoulder? How big are your hidden profits? What’s your potential for value improvement?

From The Piggy Bank

The more your people are focused on the future, the more valuable they are and the more profitable you will be.

Have a profitable week!