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4be
11-07-2012, 11:27 AM
Hi there,

I would like to clarify a few things in regards to small business'.

There is a small production business that sells the goods it produces and does not sell on credit but it's purchases are bought on credit/accounts payable.

The business has quick inventory turnaround so money isn't tied up in Working Capital. The businessseems to be profitable each year but the accounts payable are increasing each year. Revenue is flat/growing slightly.

From a cash flow perspective you can make the business look more cash flow positive by delaying the payment of accounts payable. Is this correct?

If the business was drawing out every bit of cash in the business and A/P was increasing each year , the owners are in effect using this "debt" to pull more cash of the business. Is this correct?

Would this slowly turn into a long term problem?

Appreciate the feedback and hope you understand my question
Cheers

CJ
11-07-2012, 12:21 PM
Why are accounts payable increasing each year. Is it because they aren't paying them/paying them slowly or because the business is growing (ie. Year 1 - sales $10,000 COGS/accounts payable $5,000, year 2 - sales $20,000 COGS/accounts payable $10,000). The later is not a problem as the accounts payable turnover (average age of debts) shouldn't be increasing and is just the function of a growing business.

If the average age of debts is increase, yet the bank balance isn't you need to investigate. Eg could be because sales aren't covering costs, or because the owners are taking out too much in drawings/salaries, or because someone is defrauding them and blowing it at SkyCity. A cashflow should cover all cash movements, operating and non operation (incl drawings etc) to show the full picture.

4be
11-07-2012, 12:42 PM
Why are accounts payable increasing each year. Is it because they aren't paying them/paying them slowly or because the business is growing (ie. Year 1 - sales $10,000 COGS/accounts payable $5,000, year 2 - sales $20,000 COGS/accounts payable $10,000). The later is not a problem as the accounts payable turnover (average age of debts) shouldn't be increasing and is just the function of a growing business.

If the average age of debts is increase, yet the bank balance isn't you need to investigate. Eg could be because sales aren't covering costs, or because the owners are taking out too much in drawings/salaries, or because someone is defrauding them and blowing it at SkyCity. A cashflow should cover all cash movements, operating and non operation (incl drawings etc) to show the full picture.

Thanks CJ,

I think the drawings/salaries point could be the answer. I will look up the accounts payable turnover and do some investigating. To me the company's owners are pulling too much cash out of the business and possibly the business isn't giving them the return they are after , hence bank balance isn't growing, therefore pushing out the Accounts Payable.

CJ
11-07-2012, 02:09 PM
That seems a very short term solution. May make sense if you are repaying personal debt and increasing (tax deductible) business debt but this shouldn't be at the expense of creditors.

While I am a fan of the limited liability company, I think people take it too far when they push companies into liquidation by what can only be described as negligence or reckless trading (ie. taking out too much drawings). However, the costs in pursuing by the liquidator are too much for what is normally a limited return.

Assuming the worst: If you are an employee, make sure your annual leave balance is low as you dont want to loose that should they go under. Also make sure they are paying their tax bill (GST, PAYE, income tax) as IRD is the biggest petitioner for liquidations.

percy
11-07-2012, 05:53 PM
I run a small business.I have found with internet banking I am being paid very quickly.In fact I have the use of two weeks turnover now.I reached the point awhile ago that I pay all my accounts on invoice.This inturn has led to better terms from my suppliers,most of whom have to wait 60 days for payment.It also saves me time paying my accounts and less time following up people who have missed paying me.
Any one delaying paying their accounts would send warning bells to me.I think in business you must be very fair to both customers and suppliers.

4be
11-07-2012, 07:35 PM
I run a small business.I have found with internet banking I am being paid very quickly.In fact I have the use of two weeks turnover now.I reached the point awhile ago that I pay all my accounts on invoice.This inturn has led to better terms from my suppliers,most of whom have to wait 60 days for payment.It also saves me time paying my accounts and less time following up people who have missed paying me.
Any one delaying paying their accounts would send warning bells to me.I think in business you must be very fair to both customers and suppliers.

Thanks Percy,

This bussiness receives all its EFTPOS sales at the end of each day and the cash is deposited the following Tuesday. There is basically no A/R.

CJ
11-07-2012, 08:01 PM
I am involved with a couple of businesses. One ensures that all its invoices are paid monthly (around the 20th). You dont want to piss off suppliers as you dont know when you will need an urgent order done.

One of the other businesses actually ended up paying the suppliers supplier direct half why through a large contract with lots of legal work done re ownership. This was because the supplier was treating their supplier as a bank. That business went into liquidation once the suppliers had enough and it was only the ffact we had ownership of all the parts that the work was actually completed.

elZorro
11-07-2012, 09:25 PM
4be, if this business is for sale then your analysis could help you strike a better deal. Sometimes a business can be run in a managed way when an owner operator is all it will stand. Overheads might be too high and could be reduced (buy second hand instead of leasing plant etc) with a bit more capital being employed up front. Selling product without any credit reduces sales, could be an opening there. As others have said, paying promptly and buying in bulk can produce great savings once the suppliers are on board. Always ask for a discount when you're spending a fair bit, you won't get one unless you ask. And shop around. One other thought, I hope this business transforms the goods in some way, creating an edge. Standard retail is scary.

4be
12-07-2012, 03:26 PM
4be, if this business is for sale then your analysis could help you strike a better deal. Sometimes a business can be run in a managed way when an owner operator is all it will stand. Overheads might be too high and could be reduced (buy second hand instead of leasing plant etc) with a bit more capital being employed up front. Selling product without any credit reduces sales, could be an opening there. As others have said, paying promptly and buying in bulk can produce great savings once the suppliers are on board. Always ask for a discount when you're spending a fair bit, you won't get one unless you ask. And shop around. One other thought, I hope this business transforms the goods in some way, creating an edge. Standard retail is scary.

Thanks for the points people,

It's not a business I am looking to buy only one I am associated with. I felt my points and reasoning were not coming across to the owners therefore wanted to make sure my thought process was right. Cheers!