Expense to Profit Conversion Cycle

Expense to Profit Conversion Cycle

 

Mo’s Widgets –  Expense to Profit Conversion Cycle

 

                                      Or………..

 

“It takes me HOW long to turn an expense into a profit???

 

Mo’s inventory average is $75,000

Mo’s has to pay his suppliers in 30 days when he buys.

Mo sells to his customers and it takes them 60 days to pay MO.

 

Annual Revenue                      $500,000

 

Cost of Goods (60%)              $300,000

 

Operating Expenses                $110,000

 

Profit for Mo                          $  90,000

 

Mo’s Cash Conversion Cycle

 

Mo buys a widget for $300 that he will sell for $500. Gross profit $200, nice!

 

June 1 – Mo buys the widget.

 

July 1  – Mo pays his supplier $300.

 

June, July, August –  the widget sits in Mo’s warehouse (remember his average inventory is $75,000 and his annual cost of goods is $300,000 ….$300,000/$75,000 = 4 …which is how many times per year Mo turns his inventory. 4 times per year is once every 3 months)

 

September 1 –  Mo sells the widget to Jack’s Stuff, Inc.

 

November 1 –  Jack pays Mo for the widget.

 

Mo’s cash conversion is 120 days. Mo paid for the widget on July 1 and Mo got paid by Jack on November 1.

 

Question- Who pays Mo’s employees, rent, phones, etc. during this period?

 

Answer – Mo’s working capital, which he better have enough of or Mo will be out of business.

 

Confidentiality when Buying a Business

A lot of things can go wrong when buying a business. Here’s some background on the Importance of Confidentiality. If you want to buy a business….understanding this issue can be the difference between buying a business and losing a good opportunity. Below is a 2 minute video discussing the importance of confidentiality when you buy a business:

Minute video Confidentiality in a Business sale

Note: Please note that this information is copyright protected and can not be reproduced without the written consent of Sunbelt Business Brokers Houston Texas or Dan Elliott.

Small Business Accounting Cash vs Accrual Made Easy

Small business accounting

Cash Flow Made Easy

Small business accounting – Cash vs Accrual – Does it matter? Yes it Does.

It is not uncommon for us to receive financial information from business owners where for instance the tax returns are done on a cash basis and the financials are done on accrual basis. Often they are technically both correct but just looking at the numbers you’d think they were 2 different businesses.

Accrual accounting, done coreectly, usually presents a more accurate picture of the business. Accrual accounting simply attempts to match the revenue to the expenses when they are incurred or earned. Cash accounting simply accounts for the revenue or expenses when you recieve the cash or pay the bills.

In reality, cash accounting is almost never pure nor is accrual accounting.

Some (many) small business owners don’t understand the difference nor the effect on their financials. One way to sort out the difference is really easy. In QuickBooks and most other small business accounting packages there is a check box for reports. You can decide if you want accrual or cash. I suggest you run both on the same day and look at the differences. You might be surprised at what you learn.

 

Drop me a note below if you want me to take a shot at any other small business accounting or financing issues.

Also, look at Expense to profit Cash Conversion Process for more info on working capital and cash management.

Other Articles about Running a Small Business: