PROFIT ISN\u2019T EVERYTHING<\/strong><\/span><\/h2>\nA good manager can\u2019t stop at the end of the above questions!<\/p>\n
Beyond profit analysis, business managers should move on to financial condition analysis and cash flow analysis. They should have a close look at the three basic financial reports, income statement, balance sheet and cash flows statement, and see how they interlock with one another.<\/p>\n
![\"Vienna](\"http:\/\/viennaadvantage.com\/blog\/wp-content\/uploads\/VA_Financial-Management-Module.png\")
<\/a><\/strong><\/span><\/p>\n\u201cVIENNA Advantage Financial Management Module, includes complete external accounting process, as well as management accounting, controlling different posting types, and allow multi-dimensional view on your corporate finance trough different financial reports.\u201d <\/em><\/p>\nFor more information download our Financial Management Brochure<\/a>,<\/em> or go to our ERP & CRM<\/a> business solution page.<\/em><\/p>\n <\/p>\n
<\/p>\n
SALES REVENUE & ACCOUNTS RECEIVABLE <\/strong><\/span><\/h2>\nHow Sales Revenue Drives Accounts Receivable?<\/span><\/p>\nEvery company has a mix of quick, regular, and slow-paying customers. Extending credit to customers will lead to creating a cash inflow lag. The accounts receivable balance is the amount of this lag. At year-end the amount the balance in this asset account is the amount of uncollected sales revenue.<\/p>\n
Let\u2019s have a look at the following example:<\/p>\n
\n- Sales Revenue for the year (Income Statement) = $52,000,000<\/li>\n
- Accounts Receivable at End of Year (Balance Sheet) = $5,000,000<\/li>\n<\/ul>\n
\u00a0The relationship between annual sales revenue and the ending balance of accounts receivable, can be expressed through the average sales credit period<\/strong> \u2013 determines the size of accounts receivable. The longer the average sale credit period, the larger the accounts receivable amount.<\/p>\nIn order to determine the average sales credit period we should first calculate the following ratio:<\/p>\n
\n$52,000,000 Sales Revenue \/<\/span> $ 5,000,000 Accounts receivable =<\/span> 10.4 Times<\/em><\/strong><\/p>\n<\/blockquote>\nThis calculation gives the accounts receivable turnover ratio<\/strong>. If we want to know the average sales credit period (in weeks) <\/strong>we should divide the ratio in 52 weeks:<\/p>\n\n52 Weeks \/<\/span> 10.4 Accounts Receivable Turnover Ratio =<\/span> 5 Weeks<\/strong><\/p>\n<\/blockquote>\nTime is the essence of the mater. What interests the business manager, and the company\u2019s creditors and investors as well, is how long it takes on average to turn accounts receivable ratio into cash. (In our example the company needs 5 Weeks, on average).<\/p>\n
The manager in charge has to decide whether the average credit period is getting out of hand. The manager can shorten credit terms, shut off credit to slow payers, or step up collection efforts.<\/p>\n
To make an important point here assume that without losing any sales the company\u2019s average sales credit period has been shortened to 4 weeks, instead of 5 weeks. In this scenario, the company\u2019s ending accounts receivable balance would have been $1,000,000 less, or $4,000,000 in total. In this way the company would have collected $1,000,000 more cash during the year!<\/p>\n
VIENNA Advantage Financial management module provides you versatile reporting & report creation features that allow both, a top-down review of financial information as well as drill-down to individual accounts and review specific transactions. Find out more here<\/a> or contact us<\/a> for more detailed information.<\/em><\/p>\nCOST OF GOODS SOLD EXPENSE AND INVENTORY<\/strong><\/span><\/h2>\nHolding products in Inventory before they are sold<\/span><\/p>\nCost of goods sold<\/strong> expense means just that- the cost of all products sold to customers during the year. For manufacturing companies, this is by far the largest expense in the company\u2019s income statement.<\/p>\nTo sell products, most companies must keep a stock of products on hand, which is called inventory.<\/strong> The inventory asset is reported at cost in the balance sheet, not at its sales value. The inventory asset account accumulates the cost of the products purchased or manufactured. Acquisition cost stays in an inventory asset account until the products are sold to customers. At this time, the cost of the products is removed from inventory and charged out to cost of goods sold expense.<\/p>\nThe size of the inventory is determined by the average inventory holding period. <\/strong>Suppose we did not know the company\u2019s average inventory holding period, we can determine it using the following information from its financial statements:<\/p>\n\n- Cost of Goods Sold Expense (Income Statement) = $33,800,000<\/li>\n
- Inventory (Balance Sheet) = $8,450,000<\/li>\n<\/ul>\n
The longer the manufacturing and warehouse holding period, the larger is the inventory amount. Business managers prefer to operate with the lowest level of inventory possible, without causing lost sales due to products being out of stock when customers want to buy them.<\/p>\n
In order to determine the average inventory holding period we should first calculate the inventory turnover ratio:<\/p>\n
\n$33,800,000 Cost of Goods Sold Expense \/<\/span> $8,450,000 Inventory =<\/span> 4 Times<\/strong><\/p>\n<\/blockquote>\nDividing this ration into 52 weeks gives the average inventory holding period<\/strong> expressed in number of weeks:<\/p>\n\n52 Weeks \/<\/span> 4 Inventory Turnover Ratio =<\/span> 13 Weeks<\/strong><\/p>\n<\/blockquote>\nWhat interests the managers, as well as the company\u2019s creditors and investors, is how long the company holds inventory before products are sold. If the holding period is longer than necessary, too much capital is being tied up in inventory. Or, the company may be cash poor because it keeps too much money in inventory and not enough in the bank.<\/p>\n
In summary, if inventory holding period is too long, capital is being wasted, if too short profit opportunities are being missed.<\/p>\n
<\/p>\n
INVENTORY AND ACCOUNTS PAYABLE<\/strong><\/span><\/h2>\nThe company\u2019s inventory holding period is much longer than its purchase credit period (which is typical for most businesses). In other words, accounts payable are paid much sooner than inventory is sold.<\/p>\n
Based on its experience and policies, a business knows the average purchase credit period for its production-related purchases, and can easily calculate the average inventory holding period. From here we can easily calculate the year-end balance of accounts payable for inventory-related purchases.<\/p>\n
Accounts Payable for inventory-related purchases:<\/span><\/strong><\/p>\n\n[Average purchase credit period for production-related purchases \/<\/span> Average inventory holding period] x<\/span> Inventory<\/strong><\/p>\n<\/blockquote>\nOPERATING EXPENSES AND ACCOUNTS PAYABLE<\/strong><\/span><\/h2>\nOperating expenses (Selling, General and Administrative Expenses) include all business expenses except: cost of goods sold, interest, depreciation and income tax expenses.<\/p>\n
Based on its experience, a business should know the average time it takes to pay its short term accounts payable arising from unpaid operating expenses.<\/p>\n
Account Payable (for operating expenses):<\/span><\/strong><\/p>\n\n[Average credit period (in Weeks) \/<\/span> 52 Weeks] x<\/span> Operating Expenses for Year<\/strong><\/p>\n<\/blockquote>\n![\"VA_BENEFITS_Financial](\"http:\/\/viennaadvantage.com\/blog\/wp-content\/uploads\/VA_BENEFITS_Financial-Management-Module_.png\")
<\/a><\/p>\nVIENNA Adv<\/em>antage presents a versatile financial accounting module, packed with features to help you deal with all aspects of your business, be it, Anticipation, Acquisition, Allocation, Appropriation, Assessment or Audit. <\/em>Download brochure<\/a> or go to our ERP & CRM<\/a> business solution page.<\/em><\/p>\n\n- Make informed business decisions based on up to date information & historical records<\/li>\n
- Ascertain the effectiveness & efficiency of your business operations<\/li>\n
- Versatile reporting & financial report creation features allow both, a top-down review of financial information as well as drill-down to individual accounts and review specific transactions<\/li>\n
- In addition to balance sheets, income statements and cash flow statements, create your own financial reports with our report writer<\/li>\n
- Set up budget and analyze budget versus actual<\/li>\n
- Closely track account receivables and account payables<\/li>\n
- Manage cash-flow and trade credit; both crucial to the health of your business<\/li>\n
- Manage tax calculation & declarations<\/li>\n
- Supports accounting standards of all countries<\/li>\n
- Maintains separate document and ledger level posting<\/li>\n
- Standard and alternate reporting hierarchies<\/li>\n
- Dimensions-based reporting such as projects, sales regions, products, campaigns and more<\/li>\n
- Manage cost-centers, multiple organizations, multiple currencies and currency-rate adjustments<\/li>\n
- Automated postings for your convenience<\/li>\n
- Enhanced approvals and alerts<\/li>\n
- IFRS Compliance<\/li>\n
- Comprehensive fixed assets & asset-depreciation module<\/li>\n
- Performance analysis<\/li>\n<\/ul>\n
<\/p>\n
References: How to read financial report, John A. Tracy<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"Every business manager should use his \/ her income statement to evaluate profit performance and to ask profit-oriented questions like: Did sales revenue meet the goals and objectives for the period? Why did sales revenue increase compared with latest period? Read more…<\/a><\/p>\n","protected":false},"author":1,"featured_media":85,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[],"class_list":["post-74","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business-hacks"],"_links":{"self":[{"href":"https:\/\/onfinity.io\/blog\/wp-json\/wp\/v2\/posts\/74"}],"collection":[{"href":"https:\/\/onfinity.io\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/onfinity.io\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/onfinity.io\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/onfinity.io\/blog\/wp-json\/wp\/v2\/comments?post=74"}],"version-history":[{"count":13,"href":"https:\/\/onfinity.io\/blog\/wp-json\/wp\/v2\/posts\/74\/revisions"}],"predecessor-version":[{"id":1124,"href":"https:\/\/onfinity.io\/blog\/wp-json\/wp\/v2\/posts\/74\/revisions\/1124"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/onfinity.io\/blog\/wp-json\/wp\/v2\/media\/85"}],"wp:attachment":[{"href":"https:\/\/onfinity.io\/blog\/wp-json\/wp\/v2\/media?parent=74"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/onfinity.io\/blog\/wp-json\/wp\/v2\/categories?post=74"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/onfinity.io\/blog\/wp-json\/wp\/v2\/tags?post=74"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
<\/a><\/strong><\/span><\/p>\n\u201cVIENNA Advantage Financial Management Module, includes complete external accounting process, as well as management accounting, controlling different posting types, and allow multi-dimensional view on your corporate finance trough different financial reports.\u201d <\/em><\/p>\n For more information download our Financial Management Brochure<\/a>,<\/em> or go to our ERP & CRM<\/a> business solution page.<\/em><\/p>\n <\/p>\n <\/p>\n How Sales Revenue Drives Accounts Receivable?<\/span><\/p>\n Every company has a mix of quick, regular, and slow-paying customers. Extending credit to customers will lead to creating a cash inflow lag. The accounts receivable balance is the amount of this lag. At year-end the amount the balance in this asset account is the amount of uncollected sales revenue.<\/p>\n Let\u2019s have a look at the following example:<\/p>\n \u00a0The relationship between annual sales revenue and the ending balance of accounts receivable, can be expressed through the average sales credit period<\/strong> \u2013 determines the size of accounts receivable. The longer the average sale credit period, the larger the accounts receivable amount.<\/p>\n In order to determine the average sales credit period we should first calculate the following ratio:<\/p>\n $52,000,000 Sales Revenue \/<\/span> $ 5,000,000 Accounts receivable =<\/span> 10.4 Times<\/em><\/strong><\/p>\n<\/blockquote>\n This calculation gives the accounts receivable turnover ratio<\/strong>. If we want to know the average sales credit period (in weeks) <\/strong>we should divide the ratio in 52 weeks:<\/p>\n 52 Weeks \/<\/span> 10.4 Accounts Receivable Turnover Ratio =<\/span> 5 Weeks<\/strong><\/p>\n<\/blockquote>\n Time is the essence of the mater. What interests the business manager, and the company\u2019s creditors and investors as well, is how long it takes on average to turn accounts receivable ratio into cash. (In our example the company needs 5 Weeks, on average).<\/p>\n The manager in charge has to decide whether the average credit period is getting out of hand. The manager can shorten credit terms, shut off credit to slow payers, or step up collection efforts.<\/p>\n To make an important point here assume that without losing any sales the company\u2019s average sales credit period has been shortened to 4 weeks, instead of 5 weeks. In this scenario, the company\u2019s ending accounts receivable balance would have been $1,000,000 less, or $4,000,000 in total. In this way the company would have collected $1,000,000 more cash during the year!<\/p>\n VIENNA Advantage Financial management module provides you versatile reporting & report creation features that allow both, a top-down review of financial information as well as drill-down to individual accounts and review specific transactions. Find out more here<\/a> or contact us<\/a> for more detailed information.<\/em><\/p>\n Holding products in Inventory before they are sold<\/span><\/p>\n Cost of goods sold<\/strong> expense means just that- the cost of all products sold to customers during the year. For manufacturing companies, this is by far the largest expense in the company\u2019s income statement.<\/p>\n To sell products, most companies must keep a stock of products on hand, which is called inventory.<\/strong> The inventory asset is reported at cost in the balance sheet, not at its sales value. The inventory asset account accumulates the cost of the products purchased or manufactured. Acquisition cost stays in an inventory asset account until the products are sold to customers. At this time, the cost of the products is removed from inventory and charged out to cost of goods sold expense.<\/p>\n The size of the inventory is determined by the average inventory holding period. <\/strong>Suppose we did not know the company\u2019s average inventory holding period, we can determine it using the following information from its financial statements:<\/p>\n The longer the manufacturing and warehouse holding period, the larger is the inventory amount. Business managers prefer to operate with the lowest level of inventory possible, without causing lost sales due to products being out of stock when customers want to buy them.<\/p>\n In order to determine the average inventory holding period we should first calculate the inventory turnover ratio:<\/p>\n $33,800,000 Cost of Goods Sold Expense \/<\/span> $8,450,000 Inventory =<\/span> 4 Times<\/strong><\/p>\n<\/blockquote>\n Dividing this ration into 52 weeks gives the average inventory holding period<\/strong> expressed in number of weeks:<\/p>\n 52 Weeks \/<\/span> 4 Inventory Turnover Ratio =<\/span> 13 Weeks<\/strong><\/p>\n<\/blockquote>\n What interests the managers, as well as the company\u2019s creditors and investors, is how long the company holds inventory before products are sold. If the holding period is longer than necessary, too much capital is being tied up in inventory. Or, the company may be cash poor because it keeps too much money in inventory and not enough in the bank.<\/p>\n In summary, if inventory holding period is too long, capital is being wasted, if too short profit opportunities are being missed.<\/p>\n <\/p>\n The company\u2019s inventory holding period is much longer than its purchase credit period (which is typical for most businesses). In other words, accounts payable are paid much sooner than inventory is sold.<\/p>\n Based on its experience and policies, a business knows the average purchase credit period for its production-related purchases, and can easily calculate the average inventory holding period. From here we can easily calculate the year-end balance of accounts payable for inventory-related purchases.<\/p>\n Accounts Payable for inventory-related purchases:<\/span><\/strong><\/p>\n [Average purchase credit period for production-related purchases \/<\/span> Average inventory holding period] x<\/span> Inventory<\/strong><\/p>\n<\/blockquote>\n Operating expenses (Selling, General and Administrative Expenses) include all business expenses except: cost of goods sold, interest, depreciation and income tax expenses.<\/p>\n Based on its experience, a business should know the average time it takes to pay its short term accounts payable arising from unpaid operating expenses.<\/p>\n Account Payable (for operating expenses):<\/span><\/strong><\/p>\n [Average credit period (in Weeks) \/<\/span> 52 Weeks] x<\/span> Operating Expenses for Year<\/strong><\/p>\n<\/blockquote>\n VIENNA Adv<\/em>antage presents a versatile financial accounting module, packed with features to help you deal with all aspects of your business, be it, Anticipation, Acquisition, Allocation, Appropriation, Assessment or Audit. <\/em>Download brochure<\/a> or go to our ERP & CRM<\/a> business solution page.<\/em><\/p>\n <\/p>\n References: How to read financial report, John A. Tracy<\/em><\/p>\n","protected":false},"excerpt":{"rendered":" Every business manager should use his \/ her income statement to evaluate profit performance and to ask profit-oriented questions like: Did sales revenue meet the goals and objectives for the period? Why did sales revenue increase compared with latest period? Read more…<\/a><\/p>\n","protected":false},"author":1,"featured_media":85,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[],"class_list":["post-74","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business-hacks"],"_links":{"self":[{"href":"https:\/\/onfinity.io\/blog\/wp-json\/wp\/v2\/posts\/74"}],"collection":[{"href":"https:\/\/onfinity.io\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/onfinity.io\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/onfinity.io\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/onfinity.io\/blog\/wp-json\/wp\/v2\/comments?post=74"}],"version-history":[{"count":13,"href":"https:\/\/onfinity.io\/blog\/wp-json\/wp\/v2\/posts\/74\/revisions"}],"predecessor-version":[{"id":1124,"href":"https:\/\/onfinity.io\/blog\/wp-json\/wp\/v2\/posts\/74\/revisions\/1124"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/onfinity.io\/blog\/wp-json\/wp\/v2\/media\/85"}],"wp:attachment":[{"href":"https:\/\/onfinity.io\/blog\/wp-json\/wp\/v2\/media?parent=74"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/onfinity.io\/blog\/wp-json\/wp\/v2\/categories?post=74"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/onfinity.io\/blog\/wp-json\/wp\/v2\/tags?post=74"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}SALES REVENUE & ACCOUNTS RECEIVABLE <\/strong><\/span><\/h2>\n
\n
\n
\n
COST OF GOODS SOLD EXPENSE AND INVENTORY<\/strong><\/span><\/h2>\n
\n
\n
\n
INVENTORY AND ACCOUNTS PAYABLE<\/strong><\/span><\/h2>\n
\n
OPERATING EXPENSES AND ACCOUNTS PAYABLE<\/strong><\/span><\/h2>\n
\n
<\/a><\/p>\n\n