Tag Business

Average Payment Period

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Average payment period (APP) is one of the activity ratios which measures the relationship between accounts payable and average purchases per day. Activity ratios help businesses to measure how efficiently various accounts are converted into sales or cash. Other activity ratios include average collection period, total asset turnover and inventory turnover analysis.

APP calculates how efficiently accounts payable are settled. It indicates, on average, how many days does it take to pay off accounts payable. APP is also referred to as the average age of accounts payable or the accounts payable turnover ratio.

The formula to calculate the APP is as follows:

APP = Accounts payable/Average purchases per day

The figure for accounts payable is obtained from the balance sheet and the figure for purchases is indirectly obtained from the income statement. Here the difficulty of calculating APP is highlighted. A figure for purchases is usually not available. Therefore, purchases are usually estimated as a percentage of cost of goods sold, which is in turn obtained from the income statement.

Purchases must be adjusted for credit purchases. This is done by deducting cash purchases. Further, credit purchases must be divided by the number of days per year to finally obtain average purchases per day.

Average credit purchases per day = Credit purchases/365

Example calculation

Assume First Parsons Company has accounts payable of $840,000 and credit purchases of $5,300,000. First Parsons Company was granted credit terms of 30 days by all its creditors. Assume there are 365 days year.

The average payment period of First Parsons Company is calculated as follows:

Firstly, we need to calculate the average credit purchases per day.

Average credit purchases per day = Credit purchases/365

= $5,300,000/365

= $14,520.55

Now, we are ready to calculate APP.

= $840,000/$14,520.55

=57.85 days

= 58 days

The APP of the First Parsons Company is 58 days. It takes on average 58 days to settle the accounts payable. However, the credit terms granted by creditors to First Parsons Company is 30 days. This means that company’s creditors require accounts to be settled within 30 days.

In light of this information, it is evident that payment of accounts payable is inadequately managed. If First Parsons Company will not attend to this issue in a timely manner, the current payment practices may lead to a number of harmful effects. Such harmful effects may include the inability to buy on credit from current suppliers, damage to the credibility of the business and a significantly deteriorating credit rating. This will be very harmful for the firm due to the further limitations it will impose on obtaining credit.

Things to note about this ratio

The average payment period analysis is only relevant when compared to credit terms granted to the business.

APP allows businesses to gain a better understanding of the cash outflows to be anticipated. Understanding of cash outflows is vital for successful operation of the business.

Average payment period analysis also identifies trends in the payment of the accounts payable. This can bring to management’s attention important variables that must be investigated to ensure successful operation of the business. For example, if the APP of the business increased from 30 to 68 days over 1 year while credit terms extended to the business remained the same at 30 days, a further investigation will be required to understand such a large increase in this ratio.

Further, to obtain a better understanding, one should compare the APP ratio to industry averages, to the ratio of leading firms in the industry and to the firm’s own historical results.

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Average Collection Period

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The average collection period is one of the activity ratios which measures the relationship between accounts receivable and average credit sales per day. Activity ratios help businesses to measure how efficiently various accounts are converted into sales or cash. Other activity ratios include average payment period, total asset turnover and inventory turnover analysis.

It calculates how efficiently accounts receivable are collected. It indicates the quality of debtors of the business (how promptly debtors pay their bills as they come due). It is also referred to as the average age of accounts receivable, debtors collection period ratio or a collection ratio.

The formula to calculate the average collection period ratio is as follows:

Average Collection Period = Accounts receivable/Average sales per day

The figure for accounts receivable is obtained from the balance sheet and the figure for sales is obtained from the income statement. Sales must be further adjusted to credit sales, by excluding cash sales. Further, credit sales must be divided by the number of days per year to finally obtain average sales per day (average credit sales per day).

Average sales per day = Credit sales/365

Example calculation

Assume Heroic Company has accounts receivable of $750,000 and credit sales of $4,050,000. Heroic Company has credit terms of 30 days. Assume 365 days year.

The average collection period of Heroic Company is calculated as follows:

Average sales per day = Credit sales/365

= $4,050,000/365

= $11,095.89

Average collection period = $750,000/$11,095.89=67.6 days = 68 days.

It takes on average 68 days to collect the accounts receivable. However, the credit terms of Heroic Company is 30 days. This means that company’s customers have 30 days to settle their accounts.

In light of this information, it is evident that collection of accounts receivable and/or process of granting the credit to customers is inadequately managed. The performance and processes of credit and collection departments should be investigated to draw further conclusions.

Things to note about this ratio

Results are only relevant when compared to a company’s credit terms.

The average collection period ratio therefore allows business to gain a better understanding of the cash inflows to be anticipated. Understanding of cash inflows are vital for successful operation of the business.

It also allows to identify trends in the collection of the accounts receivable. This can bring to management’s attention important variables that must be investigated to ensure successful operation of the business. For example, if the average collection period of the business increased from 30 to 68 days over 1 year, a further investigation will be required to understand such a large increase in this ratio.

Furthermore, to obtain a better understanding, one should compare the average collection period ratio to industry averages, to the ratio of leading firms in the industry and to the firms own historical results.

 

Inventory Turnover Analysis

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Inventory turnover analysis measure the liquidity of a firm’s inventory. It measures how many times the company turns over (sells, uses or replaces) its inventory during a period, such as the financial period.

It is calculated by dividing cost of goods sold by inventory. The formula is as follows.

Inventory Turnover = Cost of goods sold/Inventory

The results can be conveniently used to calculate the average age of inventory (also called average number of days sales in inventory or inventory turnover days) with the following formula:

Average age of inventory = 365/Inventory Turnover

Example of inventory turnover analysis

Assume Gold Co. has cost of goods sold of $1,850,000 and inventory of $680,000. Assume there are 365 days in the year. The inventory turnover analysis and average age of inventory analysis for the Gold Company is conducted as follows:

Inventory turnover analysis:

$1,850,000/$680,000=2.7

This indicates the business turns over its inventory 2.7 times per year.

Average age of inventory:

365/2.7=135.2

Things to note about inventory turnover analysis

The results are only meaningful when used in comparison. It can be compared to industry averages, to the firm’s past inventory ratios and to ratios of competitors.

Industry averages differ significantly between industries for this ratio. This ratio is positive (higher than zero) as long as the firm has any inventory. Generally, a high ratio is considered to be a good indicator.

However, the norm would differ significantly between industries. If the ratio is too high when compared to the norm within the industry, it may mean the company keeps too little inventory and, therefore, may lose some sales. On the other hand, a low ratio may indicate excess inventory and inferior sales. Excess inventory is usually considered to be undesirable as inventory is an investment without return, holding inventory implies costs and prices of goods to be sold may start decreasing.

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Total Asset Turnover

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Total asset turnover is one of the activity ratios indicating the relationship between assets and sales (revenue). Activity ratios help businesses to measure how efficiently various accounts are converted into sales or cash. Other activity ratios include average payment period, average collection period and inventory turnover analysis.

It calculates how efficiently assets are used to produce sales or revenue. In other words, how efficiently the balance sheet is managed. It shows how many dollars of revenue is earned per each dollar of assets. It is also referred to as asset turnover or asset turnover ratio.

The formula to calculate the ratio is as follows:

= Sales(Revenue)/Total assets

The health of this ratio is an important factor which contributes to a healthy return on investment (ROI/ROA).

Example of total asset turnover ratio analysis

Assume Heroic Company has sales of $750,000 and total assets of $880,000. The total asset turnover of Heroic Company is calculated as follows:

$750,000 /$880,000=0.85 or 0.9

This indicates that Heroic Company turns over its assets 0.85 (0.9) times per year.

Things to note about total asset turnover ratio

Usually the higher the asset turnover number the more efficiently assets of the business are utilized.

Further, to obtain a better understanding, one should compare the ratio of individual firms to industry averages, to that of leading firms in the industry and to historical results.

Calculating gross profit

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Calculating gross profit is simple and straightforward. In summary, we need to subtract cost of goods sold from the sales revenue.

Whilst making this calculation, we need to have a good understanding of the format of the Income Statement, as shown below. More details can be found in the format of the income statement section.

Income Statement Format

Sales revenue

 

LESS: Cost of goods sold

= Gross profit

LESS: Operating expenses

= EBIT (earnings before interest and tax/operating profit)

LESS: Interest

= Net profit before tax

LESS: Taxes

= Net profit after tax

LESS: Preferred stock dividends

= Earnings available for common stockholders

Therefore, all we need to do is to subtract cost of goods sold from the sale revenue. But how do we find the cost of goods sold? To calculate the cost of goods sold, we need to take the following steps:

Cost of goods sold =

Opening inventory

ADD: Purchases

LESS: Closing inventory

Gross profit allows us, among other things, to calculate the Gross Profit Margin Ratio , which is:

Gross Profit Margin = Gross Profit / Sales GPMR measures how much of each sales dollar is remaining after costs of goods are deducted. In other words it measures the relative cost of goods sold.

Six ways to enhance your personal style

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Dress code as seen at a London Club in the Soh...

Image via Wikipedia

Your personal style significantly influences perceptions that people have of you. Moreover, it rolls up into being your brand or personal image. Often perceptions that people have of you are very one-sided and heavily affected by one negative or positive characteristic which is the so-called “halo effect”, which is one of the biases that people have when forming perceptions of others.

You can definitely influence how people perceive you. You need to adjust your personal style to build your brand the same way as Coca Cola and amazon.com builds theirs. You can be anything you want to be and make people think anything you would like them to.

You just need to consciously manage your brand. It must be of the highest caliber, consistent and credible. You can call it your personal style, your personal image or personal brand. It does not matter. Everyone has one and you need to control your own.

Below are six ideas which can significantly help you build your personal style and, hence, your brand.

1 – Over invest during the first 6 months

You probably noticed when you join a new company or when you start a degree in university, a perception about who you are and what you are capable of develops and is usually based on what you do over the very first few months. Therefore, if you give everything you have over those first 6 months, you will lay a great foundation upon which to build your success.

2 – Appearance counts

Numerous studies have indicated that people prefer attractive and neat people. The way you dress, the way you walk and the way you communicate are all part of your personal style and contributes to the way people see you.

3 – Dress a level higher than the majority

You need to always dress for your next job. If you are a business analyst in a consulting firm, dress as a consultant or even a senior consultant or a manager. Even if more senior people in the work place are dressed very casually, but the overall dress code is business casual, you should be dressed just a level higher than the majority of your colleagues and superiors.

This generally will show that you take your job and career seriously, that you are here to do business and you intend to go far in life. This sends a message that you come to work not to socialize and make friends but to bring great value to the company and the customers. This will make you stand out.

Of course, there are exceptions. Some companies specifically stay away from a professional dress code. A good example is Google, employees of which follow a very casual dress code. But in most cases, this guideline will make you stand out and get noticed. Of course, your other actions, such as the quality of your work are also ingredients of your personal style and should support your overall message of excellence.

THERE IS ONE IMPORTANT WORD OF CAUTION. Dressing well must make you feel better internally and present a confident and positive message. Never ever confuse dressing better to acting better than your co-workers. Your professional dressing will generate attention, so it is very important you go out of your way to indicate that this is your preferred dressing style only and you DO NOT think you are better than your co-workers. Show this in your actions and be sincere about it. If you dress well but act better than your co-workers then you will harm your reputation.

4 – Reputation

Your personal style should be aligned with helping you to build a reputation of credibility, competence and reliability. Your superiors need to know that if there are trouble and they need someone reliable and competent, they should go to you.

5 – Always keep your word

Staying true to your word must be an important part of your personal style. Take on only what you can handle and feel free to renegotiate deadlines, where necessary and where possible. Your personal style must clearly show that you are someone who takes requests and promises seriously.

Your attitude should be one that if you promised to do something – you will do everything in your power to ensure that it gets done, one way or another. For example, if you promised to deliver a certain document by the deadline, and an unexpected and more important assignment came up, you need to do everything you can to find someone to do the first deliverable for you, and be accountable for its quality.

After you find such a person, you need to approach your superior and confirm with them if they feel comfortable with the other person taking responsibility for the deliverable that you were assigned to do.

If you have done everything you could to find someone and there is just nobody available, than you can approach your superior and describe the situation. He or she may then make a decision on how best to proceed.

The bottom line is, you need to be proactive, reliable and feel ultimately accountable for any work you promise to do. Keeping your word must be seen by others as an important ingredient of your personal style. It is also important to be consistent in your personal style across different parts of your life, which includes your personal style in your relationships outside of work.

6 – Under promise and over deliver

This simple technique can help you greatly in establishing an image of competence and excellence. Furthermore, this technique is useful in any area of your life: in your studies, in your career and in your personal life. By following this simple rule, you will consistently exceed people’s expectations and will, therefore, have the reputation of someone who always exceeds expectations.

***

The above ideas are really important and rarely implemented. If you will adapt it to enhance your personal style, this alone will set you apart from the crowd.

Business ethics

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Strong business ethics is vital to ensure a successful long-term career. One single thing that you can do that will make you stand out in life and in business is to cultivate very strong fundamental values and make it define who you are.

In practice, strong business ethics is not a common trait in employees, as you may have noticed yourself. If ethics were common we would not need so many laws and enforcement agencies. We could simply expect employees to do what is right. This, however, gives you a competitive advantage. In business, strong fundamental values could include many things but the underlying value is integrity at all times. Integrity must guide all dealings with internal and external stakeholders.

More important than integrity is the image of having integrity. It is a halo which can protect you from accusations. It takes years to develop this halo but it can be lost in one act, lasting just one second.

To cultivate strong business ethics, one needs to acquire or strengthen several business values that are vital for anyone who would like to succeed as a professional and as a leader.

Guide to business ethics

Be ethical regardless of the consequences in dealing with stakeholders of an organisation.

Do what is the best for the company. Sometimes it can mean doing what is the best for the client, if you work on projects for specific clients, such as in management consulting. Doing what is best for the company sometimes means forgoing immediate profits for the company, and even upsetting your co-workers.

  • Take pride in your work at all times.
  • Do your best work at all times.
  • Never say anything negative about someone behind that person’s back. If you have issues with someone, approach them directly.
  • Do not gossip or spread rumours. Do not take part in gossiping. Rumours have many untruths to them and you do not want to damage anyone’s reputation.
  • Be professional at all times.
  • If you promise something – deliver it as promised, but when needed, use opportunities to renegotiate the deadline.
  • Do as you advise others to do.
  • Respect your time and that of others.
  • Promote justice. Give people credit for their work and never accept credit for work done by somebody else.
  • Stand up for what you believe in. If you see wrongdoing, especially the kind that can be damaging to a company’s reputation or performance, do whatever you can to change it and refuse to be a part of it.
  • And last, but most importantly, remember that family and the people you love always come first. This does not mean that one can miss a deadline if there is a birthday coming up. In such situations you will have to negotiate with both parties and use your best judgment. What it does mean is that, in all your decisions, you need to keep your family’s interests as a highest priority. For instance, you cannot neglect your husband, wife or children for a few years while you are building your career. This will cause irreparable damage to your life. You have to incorporate their interests now into your schedule.

 

Ethics vs. Personal Commitments

Take care of yourself. Always remember that if you work yourself to the point that you will get ill, regardless of how outstanding your performance was, you will be replaced. Your employer and management may feel very sad that you are leaving, and may even have to hire two people to do your job, but they will replace you and in time forget about you.

Therefore, always remember to put your health and your family first. Those are the real assets of your life, not your title and the corner office. If you cannot reconcile the needs of your family with those of your career, then you need to think long and hard, and possibly walk away from your career.

Do not go against your values to accommodate behaviour which is not ethical.

The above points on business ethics were probably just a reminder, as they are intuitive. As you go forward, you can incorporate other guidelines that you feel are important. However, it is important to make sure that your values are not negotiable. That is why we call them values. As people often say; if you don’t have values – you don’t have anything. Values and moral principles only count when they are tested. Everyone has them unless they are put to the test. Then only a few truly have them.

Strong values will always make you stand out and are vital for your long-term success and happiness in all areas of your life.

What do you want to be known for?

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You are a brand. What kind of brand are you?

When people look at you, think about you, or work with you, they inadvertently often distil you down to a catch-phrase. You may have heard the following similar phrases in the office:

“Speak to Paul, he’s the numbers guy and can help you”

If you have any trouble, Dianne understands the marketing side best”

“If we’re going to make this client pitch tomorrow, we need Angelica involved. No one can pull it off like her and certainly not in the time we have”

For these catch-phrases to mean something they cannot be once-off references. If Paul is generally the person people go to when it comes to finance problems, if Paul positions himself as a finance specialist, if he is recognised as the finance specialist, then that is what Paul is known for. Whether he likes it or not, Paul’s actions have resulted in his brand choosing him.

Meet Diane in Sales

What you are known for within the office can be flattering or unflattering and intentional or unintentional. For example Diane may think of herself as an upcoming sales star, but the perception around the office is that she tries too hard in sales meetings and flirts with customers.

Diane may think this is all part of making sales, and feels her colleagues understand this. They may very well introduce her as a sales star when she is within earshot, but it’s what’s said when she is not around what counts. And when she is not around she’s known as the one who flirts to land a sale. This is an example of an unflattering image. Again, Diane may be asking herself, “How do I choose my brand?” However, her behaviour and choices resulted in a brand image she may not like.

Meet Preston In Health Care

Preston has been doing the same job of loading data at a hospital for years. Yet there should be no doubt, he is a stellar performer. As a business analyst he was far more interested in the operations side, but due to staff cuts and data problems he was asked to fix this problem. He did a great job, probably too good a job. His superiors kept him in this role and even the CEO, John Hennessey, mentioned his work in the quarterly report to employees. Unfortunately for Preston he is nothing more than a data jockey. It makes him unhappy and despite his efforts to break out of this role, he feels stuck. This is an example of an unintentional image. Its flattering, but not where Preston wants to be. Preston never wanted to be known as a data jockey but circumstances have led to this. Despite Preston’s dreams of moving into another role, he has been boxed into being known as a data jockey.

Is your career choosing you?

If what you currently known for is not what you want to be known for, what should you do?

  • Keep a record, over a month, of the work you are asked to do, review and/or advise upon. Make a list of the type of meetings you are invited to and the emails you receive.
  • Record the jokes people make about you (“Oh, Ria is not free on week nights. She is the super hero guardian of our data servers”). Lots of truths are conveyed as a joke.
  • When you offer co-workers any help, record the type of help they request. They usually jump to the one thing they believe you are best at.
  • Track both technical and non-technical things. Do people view you as trustworthy, honest, reliable, respectful etc.

Once you have this information, you can build a portrait of yourself. Take a clean sheet of paper and draw two columns. One is labeled “technical” and the other is labeled “non-technical”. Be sure to use only half of each column. You will need the second half later.

On one side of a page write down all the technical things that were linked to you and on the other write down all the non-technical things. Be brutally honest with yourself.

Look at the list. Is this who you thought you were? How do you feel about this? Are you happy? Do you feel proud?

It is okay and normal to be surprised at your co-workers perception of you. Especially if this is the first time you have done the exercise. All is not lost. This difference in perception is normal and happens in everyone’s career at some point. Usually it happens more than once. Take a deep breath and go make yourself some tea or coffee.

Once you have your coffee or tea, let’s do another exercise. On the same sheet of paper, on the half which is blank, write down the technical and non-technical things for which you want to be known for. Be careful when you do this. Focus on one or two things. Like any good brand you cannot be known for everything or too many things. That is not possible. A classic mistake is to focus on the technical skills only. In business, things like values and honesty are usually very important. Make sure you pay proper attention to these. Once you have this list, save it and come back to it in a day or two. This gives you time to think about the list and ensure it is complete in your mind.

Now compare this list to the list with your colleague’s perceptions. Is there is a big difference? In what way is there a difference? Write these down as well. Now think about your typical work week. How can you do things differently, or do new things to show a change in your behaviour. You cannot tell people you have changed, you need to show them.

When you get into the office, you need to keep the new list at the back of your mind and consciously think about the image you are conveying. If you do things correctly you will notice a change in your colleagues’ behaviour. In fact, you will feel a difference in your own behaviour because you are changing.

In about 3-4 months repeat this exercise and see if there are any changes in your co-workers perceptions. Remember, perceptions take time to change so don’t be disheartened if it takes too long. The important thing is to be conscious of your image and actively manage it.

Over time, co-workers will notice you are a different person. At this point you may want to actively enage your manager about a new role. Show him or her a summary of your analyses and explain why it is ineffective using your skills. Remember, you need to show why both the company and you will benefit from the change in roles.

It is a misconception that this “boxing-in” of what you are know for happens to weaker employees. Even the best performers can be stuck in a career loop. It requires self-awareness to identify this and build a way out. These steps will definitely help you.

Developing a career track

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A career track is important to develop. When I join a company, like everyone else I am very excited and prepared to focus on building myself to move ahead. I think long and hard about my career track. Both my employer and I need to benefit from the relationship.

However, before I can start discussing my planned career track with my boss, I need to show my employer that I am excellent in my current position and due to the excellence in my current position I have permission to start thinking about and planning my career.

Jane’s Career Track

Let me give you an example. Jane is a 29 year old business analyst at a paper company. Jane is a public certified accountant and holds an MBA. She is bright, ambitious and well liked by her colleagues. Jane arrives at work promptly at 8:30am every day and leaves at 6:30pm. She is a great colleague and her co-workers like socialising with her. Jane has been an analyst for 6 months and is desperately trying to have a conversation with her manager, Karl, about moving ahead to the next level. Karl politely sidesteps these discussions and simply tells Jane she needs more experience. Jane is puzzled and keeps pressing the issue. She believes her career is on track to be Karl’s “lieutenant” in the department.

To Karl Jane is good at her work but not great. He still needs to check and sign-off all her work. She is not creative enough. While her work is good she is usually at her best when she knows what needs to happen and “disappears” for 1 to 2 weeks to complete the assignment.

To Karl Jane needs to have better attention to detail, she needs to be more creative and understand the business better. In Karl’s opinion, Jane does not act as if she is a senior business analyst and therefore does not yet have his permission to start transitioning her career to the next level. To Karl, she needs to focus on being better in her current role first. If anything,

Lessons for Jane

Jane should sit down with Karl and understand his expectations of her.

Jane must distinguish between explicit (“complete the businesses cases on each product launch, review the material for the management meeting etc”) and implicit expectations (“the team has been down recently so we hope to inject some confidence with your arrival, the analysts and marketers do not get along so I hope you can help us bridge that gap etc”).

Understand what is most important to Karl and the business.

The expectations must be clear to Jane, and where possible, be measurable and have milestones.

Jane should also discuss with Karl her expectations of working with Karl. What support, guidance, and feedback she needs.

They must agree to proper feedback meetings at regular intervals and after each major piece of work is completed. They should also agree to a performance discussion every 3 months.

This is important, Jane must determine at which point Karl will be open to discussing her career progression. It is important to note that not all companies have formal career paths, so it is not a bad idea to be proactive.

Once this meeting is over, it is best to transcribe the discussion and send an email to Karl for his records. Jane must keep the email friendly but specific. Many people forget discussions. Capturing key discussion points protects both Jane and Karl.

How should Jane use this discussion with Karl?

Over the first six months of her job Jane must be laser-like focused in ensuring she is meeting Karl’s agreed on expectations of her. Her objective now is not to focus on her distant career track, but to make sure she excels in current role. Jane must document her progress and where possible have tangible evidence of her successes.

Three months after the expectations discussion, she should arrange a discussion with Karl to discuss performance. Prior to such meeting it will be helpful if Jane summarizes her performance on a single piece of paper.

Jane’s objective in this meeting will be to determine if she is meeting or exceeding Karl’s expectations. She needs to gain clear and constructive feedback. Jane should probe for examples and areas of improvement. If this first feedback meeting will not go well, then Jane needs to buckle down and fix those problems.

If it will go well, Jane then needs to focus over the next 3 months on fixing any small development areas. In these next 3 months Jane must start acting as if she is at the next level. Now she can start thinking about her career track.

She should be careful not to overstep her authority, but must use every opportunity to show she is already at the next level. For example, if the next level requires liaising directly with clients, should that opportunity present itself, Jane should engage a client and build a good relationship for the company.

If Jane does this well, then in Karl’s mind she is exceeding expectations in her current role, shows ambition and accountability, and he will likely be open to discuss her career plans. Karl will himself start thinking about Jane’s career track. He will not want to lose a talented employee and may even initiate the discussion himself.

This is a more effective way to progress in a company. Ensure you have the implicit permission of your manager to start thinking about the next level of your career track, and start acting as if you are already at the next level. Yet before you can do this, you must over deliver in your current role. No one wants to promote an employee who cannot perform in their current role, to a more senior role.