Tuesday, November 23, 2010

Giving Thanks leads to Small Business Success

In this week of Thanksgiving, I want to take a few minutes to reflect on Giving Thanks in the context of running a small business. I recently acquired two new motivational posters to hang in my office along with my business Vision Statement. These are visual reminders about the reason that I am in the business I am. Both of the motivational posters have a line in them regarding being thankful. 

In a customer focused business model, who are the people that you should be conscious about thanking?
Thank your customers. Thanking your customers not only shows your appreciation but makes you approachable so that you can build a relationship with your customers which will keep them coming back. This relationship also allows you to ask for feedback in order to keep your company focused on your customers’ needs.

Thank your vendors and subcontracted service providers. Let them know that you appreciate the role they play in providing the services and products which allows you to run a successful business. Cultivating strong vendor relationships creates a win/win situation and allows you to provide better service to your customers.
Thank your employees. Let your employees know that they are an integral part of your team. Allow them the opportunity to shine and contribute to your business success. 

Thank your business acquaintances.  Drop a note of thanks for providing a referral or for sending a good article which you were able to apply to your business. The best way to encourage the continuation of behavior that you appreciate is to genuinely provide some positive reinforcement. A thank you is just that.
Thank your partners. They are the ones in the daily grind with you and they are often the last ones thanked for their efforts.

Thank your family and friends. Every successful entrepreneur has people in their lives who patiently endure long hours and endless conversations about work and who pick up the slack in our personal lives. Be sure to thank them for the effort.

Is there anyone else that you would include in this list? Give Thanks!

Monday, November 8, 2010

Activity ratios explained for small business owners

Last week we talked about liquidity and leverage ratios so this week we will tackle activity ratios and next week we will dive into profitability ratios.

Activity or Asset Utilization Ratios are used to determine how quickly some accounts are converted into sales or cash.

Accounts Receivable Ratios:

The accounts receivable turnover ratio gives the number of times accounts receivable is collected during the year.

Accounts Receivable Turnover = Net Credit Sales/Average Accounts Receivable

In general, the higher the accounts receivable turnover, the better, since the business is collecting its money from customers quickly and these funds can then be invested or used again.

The collection period or days sales in receivable is the number of days it takes to collect on receivables.

Average Collection Period = 365/Accounts Receivable Turnover

One cause for an increase in the accounts receivable turnover ratio may be that the business is now selling to financially unstable customers. The owner should review the aging schedule, which lists the accounts receivable according to the length of time they are outstanding to help determine if the credit policy needs revision.

Inventory Ratios:

Inventory turnover = Cost of Goods Sold/Average Inventory

Average Age of Inventory = 365/Inventory Turnover

If a business is holding to much inventory, money that could be used elsewhere is tied up in inventory. In addition, there are high carrying costs for storing the goods as well as the risk of obsolescence. On the other hand, if inventory is too low, the company may lose customers because it has run out of merchandise.

Operating Cycle: The operating cycle is the number of days it takes to convert inventory and accounts receivable to cash. A short operating cycle is desirable.

Operating Cycle = Average Age of Inventory + Average Collection Period

Total Asset Turnover: The total asset turnover ratio is helpful in determining the ability of the business to use its assets effectively to generate revenue.

Total Asset Turnover = Net Sales/Average Total Assets