In working with many, many businesses as a Greenville CPA over the years, there are 3 things that always stand out that aren’t tracked: margins, days AR outstanding and days AP outstanding.

The reason they are typically not tracked is because their accounting is bad or nonexistent.  So, the first step in being able to even figure these things out is to get your accounting right.  If you put garbage in, you get garbage out.

Margins

In this case I’m talking about gross margins.  All this means is how much money are you making off each sale, shown as a percent.  So, if you sell an umbrella for $20, and it costs you $5 to make, your margin is $15.  Divide $15 by $20 and your gross margin percent is 75%.

Is this good?

Maybe, but you’ll have no idea if it’s good or not if you don’t even know what it is…so figure it out and compare it to competitors or others in your industry (hint – go to your industry association and ask) and see where you stand.

Then, and only then, can you figure out what to do to make improvements to it.

Days AR Outstanding

This can be confusing, but it just measures how long it takes you to collect money from customers, on average.  The simplest way to calculate this is to pick a time period, say 12 months.  Figure out your average Accounts Receivable and divide that by total credit sales.  Then multiply that result times 365 (for 12 months).

The higher the number the worse off you will be.  Once you have a base measurement, you can track it and figure out how to reduce it.

Days AP Outstanding

Pretty much the same as Days AR Outstanding, this one measures how long it takes you to pay your bills.  This one is calculated by taking average Accounts Payable (calculated like above) times 365 (for 12 months).

The lower this number is the worse off you will be.

There are a lot of nuances you can play with in these calculations, but this shouldn’t stop you from calculating them.  Better yet, track them month to month so you can see the trends.

And as I stated before – if you have bad accounting, the results in these calculations will mean absolutely nothing.  Worse yet, if you don’t even know if you have bad accounting, and you rely on these calculations, you could end up making some pretty horrific decisions for your business.

Start tracking them today and you could very well achieve some amazing results.