This series started with the question: Do you want to have more financial control of your company? If you’re still reading I’m guessing you liked what you’ve read so far and want to know more. This is the place.
Once again, the big idea: you can quickly assess your company’s financial health by taking a good look at your Balance Sheet – the obvious and the not-so-obvious. The health of your company today is not determined by last year’s profit or last year’s sales. It’s determined by how well you are positioned to make the assets you own today produce a profit for you. So here’s Tip #3:
Inventory Turnover: Average Annual Cost of Goods Sold divided by Average Inventory. A major element of working capital for many companies is inventory – the stuff you make or buy, or both, to resell to your customers. Does the amount invested in your inventory– even after you write off the slow moving stuff you should have written off years ago – take up too much of your balance sheet? How can you tell? Look at a ratio called Inventory Turnover, i.e., how many times a year does your inventory completely replaces itself. Better yet, do that for each individual high value or low shelf life product you sell. Then compare turnover with the average shelf life of that product, e.g., if your inventory turns over twice a year and the product is replaced with a new version every two years, you are letting ¼ of the product life sit on your shelf tying up cash. Ask us about an inventory control system that will prevent a situation like this from happening.