3 Ways To Increase Your Cash Using Quickbooks
Cash is king in small business. If you run a small, or even medium size business, you know this. So, how can you increase your cash simply by looking at your Quickbooks reports? Below are 3 ways to increase cash in your business by looking at your Quickbooks financial statements. To do this, pull up your Profit and Loss Statement and your Balance Sheet in Quickbooks.
- Monitor your accounts receivable - your accounts receivable is what your customers owe you. One simple way to increase your cash is to get your customers to pay you quicker. Do you know how long, on average, it takes your customers to pay you? It's simple actually, and its called your Accounts Receivable Turnover. To figure this out, first take your sales and divide it by your average accounts receivable. A couple things here - first the sales number you use should be the amount of sales you have where you issue an invoice, you do not include cash sales. Second, "average" accounts receivable is the average of your accounts receivable balance over the period you are measuring.
As an example, if you are calculating the accounts receivable turnover for 2011, then take your net credit sales for 2011 and divide it by your accounts receivable balance at 1/1/11 plus the balance at 12/31/11 and divide that total by 2. This result will give you a ratio - to figure out the number of days your accounts receivable are outstanding, divide 365 by the ratio you get. So, let's say the end result is 45 days, this means it takes you 45 days, on average, to collect your accounts receivable. To increase your cash, you have to figure out how to get this number down.
- Monitor accounts payable - your accounts payable are the bills you owe to your vendors. A simple way to increase your cash is to extend out the amount of time you take to pay your vendors as long as you can. This is called your accounts payable turnover and is calculated similarly to the accounts receivable turnover. First take your credit purchases over a certain period and divide it by your average accounts payable. To get your amount of credit purchases (for a business with inventory), take your cost of goods sold, add your ending inventory and subtract your beginning inventory. Then divide this by your average accounts payable.
To see this as days it takes you to pay your accounts payable, simply divide 365 by the ratio you get for accounts payable turnover. If the result is 20 days, then on average you pay your bills in 20 days. Try to extend this out further to increase your cash.
- Manage your inventory - a final way to increase your cash is to manage your inventory more effectively. How do you do this looking at your Quickbooks reports? Again, we are going to calculate something called your Inventory Turnover. This shows you how many times you sell through your entire inventory balance over a certain time period.
Looking at your Quickbooks financial statements, take your cost of goods sold and divide it by your average inventory balance over the time period. Then, take this result and divide it into 365 to figure out how many days it takes you to sell through your inventory. As an example, if you calculate 180 days, then it takes you that long to sell through your inventory. This is rather long and it means you are leaving a lot of your cash on the shelves as inventory. To increase your cash, you have to lower these number of days and move your inventory.
These are 3 simple ways to increase your cash in your business by simply reviewing your Quickbooks financial statements. Of course, there are adjustments and caveats for service oriented businesses, or other types of businesses that do not have accounts receivable or inventory. But this is the exact reason that it is imperative to learn Quickbooks the right way - so that you have the correct data to efficiently run your business, increase your cash, and make the right operating decisions to not only survive, but thrive.