EFFICIENCY: NO, NOT THAT KIND
Most of the time when we talk about efficiency, we’re talking about you – how efficient are you? Your team? What did you accomplish? Did you waste time?
And while individual efficiency is UBER important on your path to a profitable business, this weeks’ blog is turning the spotlight away from you and onto your money.
It's all about maximizing results with minimal resources. In the realm of financial statements, it's like finding the perfect balance between income, expenses, assets, and liabilities.
FINANCIAL STATEMENTS: A REFRESHER
There are two financial statements that we pull from to understand efficiency. There’s a whole blog post that gives you an overview of them, and check out the links below for deep dives into each.
Income Statement: This is like your business's highlight reel. It shows your revenue and expenses, giving you a glimpse into your profitability.
Balance Sheet: Think of this as your business's snapshot. It tells you what you own (assets), what you owe (liabilities), and what's left for you (equity).
THE EFFICIENCY CONNECTION
Now, let's bring it all together. Business efficiency takes the spotlight when you start seeing how well your business performs based on these statements.
Working Capital Efficiency: This shows how effectively you're managing your short-term assets and liabilities. When your working capital is in harmony, your business operations run like a well-oiled machine.
Working Capital Ratio: This measures your ability to cover short-term debts. A ratio of 1 or higher is your go-to; below 1 means you might not be able to cover the money you owe.
SIMPLE MATH ALERT:
Working Capital Ratio = Current Assets / Current Liabilities
Inventory Management: Ever heard the phrase "stocked to the brim"? Well, too much inventory ties up your cash. Efficient inventory management ensures your products move swiftly, reducing holding costs. Here’s a few calculations to see how well you’re managing your inventory:
Inventory turnover: The higher, the better! It means you're not letting your inventory gather dust (this also includes raw ingredients and packaging inventory!). Aim to have your inventory flip 8-12 times a year. It means your inventory isn't sitting idle.
SIMPLE MATH ALERT:
Inventory Turnover = COGS / Avg Inventory Value
Accounts Receivable and Payable Efficiency: If clients pay you too slowly, or if you're paying your suppliers too quickly, it can affect your cash flow. Business efficiency ensures you're not stuck in a financial traffic jam.
Accounts Receivable Turnover: If any of your invoices give your clients some time to pay you, how quickly you collect is a key metric of your efficiency. This ratio tells you how efficiently you're collecting payments from clients. A higher ratio? Yep, that's the tune you want. Around 5-7 times a year is ace. Fast payments rock!
SIMPLE MATH ALERT:
Receivables Turnover = Net Sales / Avg Receivables
Accounts Payable Turnover: Here's where you pay your bills. A higher ratio means you're managing your payments like a maestro. A ratio of 10-12 times means you're keeping your financial commitments tight.
SIMPLE MATH ALERT:
Payables Turnover = COGS / Avg Payables
BOOSTING YOUR RATIOS
Numbers are great but WTF do you do if your results are NOT at the ideal level? Here’s some idea’s:
Smart Inventory Management: Keep what sells, ditch what doesn't. Don't hoard! Keep inventory at the right levels to avoid cash drain.
Charm Clients with Discounts: Promptly chase down payments – a friendly reminder can work wonders. Offer early payment discounts to get those accounts receivable flying in.
Negotiate Sweet Terms: Flex your negotiation muscles with suppliers for better payment terms.
Streamline Your Processes: Smooth processes = quicker sales and payments. Upgrade your systems, boogie down!
Cash is Queen: Keep that cash flowing – it's the lifeblood of your business.
GRAND FINALE: STAY LOOSE
Efficiency isn't a one-time show. It's an ongoing act of balance and agility. Regularly review your financial statements, analyze those ratios, and fine-tune your strategies.
It's not just about numbers; it's about harnessing your business's potential. Embrace the power of your financial statements and watch your business soar to new heights. 🚀