Living Within Your Means:
Current Account Management
The recession has slowly waned on a macro level, but unfortunately there may be trouble lingering for some business owners. What arguably caused the recession (spending beyond limits) will continue to be an issue to plague some labs for a while. The situation does not unfold overnight. Cash becomes a little tight because the business is growing fast, or a large investment in equipment does not begin to pay back as quickly as the vendor predicted.Lines of credit with banks are drawn on. Then when the line is maxed, the company gets a little behind on the payables with vendors. Then out comes the American Express card to pay current payables along with the realization that the company may be one bad customer receivable away from financial Armageddon.
Every company is unique, but a good rule of thumb in the wholesale lab industry for managing current accounts is that the ratio of vendor payables (including credit card balances) to current receivables should approximate the percentage of cost of goods to net sales. For example, if net sales for a month is $200,000, and cost of sales is $100,000 (50 percent of net sales), then payables should only be about 50 percent of current accounts receivable. If cost of sales is much higher than 50 percent of net sales, the company runs the risk of not having enough gross profit to cover labor and other operating expenses, as well as debt service.
You can't always avoid the cash crunch, but by analyzing your financials regularly and comparing the results to rules you set, you can identify a problem and correct it before it is too late.—Jason A. Meyer, managing director, HPC Puckett & Company
Based in San Diego, Calif., HPC Puckett & Company specializes in mergers and acquisitions of companies in the optical sector. You can send comments or questions about this article or any other Dollars & Sense articles to Jason A. Meyer at
To reach customer service, please call (800) 825-4696.
© 2013 VisionMonday. All Rights Reserved