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Standard Chart of Accounts

See Also:
Chart of Accounts (COA)
Problems in Chart of Accounts Design
Complex Number for SGA Expenses

Standard Chart of Accounts

In accounting, a standard chart of accounts is a numbered list of the accounts that comprise a company’s general ledger. Furthermore, the company chart of accounts is basically a filing system for categorizing all of a company’s accounts as well as classifying all transactions according to the accounts they affect. The standard chart of accounts list of categories may include the following:

The standard chart of accounts is also called the uniform chart of accounts. Use a chart of accounts template to prepare the basic chart of accounts for any subsidiary companies or related entities. By doing so, you make consolidation easier.

Organize in Numerical System

Furthermore, a standard chart of accounts is organized according to a numerical system. Thus, each major category will begin with a certain number, and then the sub-categories within that major category will all begin with the same number. If assets are classified by numbers starting with the digit 1, then cash accounts might be labeled 101, accounts receivable might be labeled 102, inventory might be labeled 103, and so on. Whereas, if liabilities accounts are classified by numbers starting with the digit 2, then accounts payable might be labeled 201, short-term debt might be labeled 202, and so on.


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Number of Accounts Needed

Depending on the size of the company, the chart of accounts may include either few dozen accounts or a few thousand accounts. Whereas, if a company is more sophisticated, then the chart of accounts can be either paper-based or computer-based. In conclusion, the standard chart of account is useful for analyzing past transactions and using historical data to forecast future trends.

You can use the following example of chart of accounts to set up the general ledger of most companies. In addition, you may customize your COA to your industry by adding to the Inventory, Revenue and Cost of Goods Sold sections to the sample chart of accounts.

SAMPLE CHART OF ACCOUNTS

Refer to the following sample chart of accounts. Each company’s chart of accounts may look slightly different. But if you are starting from scratch, then the following is great place to start.

1000 ASSETS

1010 CASH Operating Account
1020 CASH Debitors
1030 CASH Petty Cash

1200 RECEIVABLES

1210 A/REC Trade
1220 A/REC Trade Notes Receivable
1230 A/REC Installment Receivables
1240 A/REC Retainage Withheld
1290 A/REC Allowance for Uncollectible Accounts

1300 INVENTORIES

1310 INV – Reserved
1320 INV – Work-in-Progress
1330 INV – Finished Goods
1340 INV – Reserved
1350 INV – Unbilled Cost & Fees
1390 INV – Reserve for Obsolescence

1400 PREPAID EXPENSES & OTHER CURRENT ASSETS

1410 PREPAID – Insurance
1420 PREPAID – Real Estate Taxes
1430 PREPAID – Repairs & Maintenance
1440 PREPAID – Rent
1450 PREPAID – Deposits

1500 PROPERTY PLANT & EQUIPMENT

1510 PPE – Buildings
1520 PPE – Machinery & Equipment
1530 PPE – Vehicles
1540 PPE – Computer Equipment
1550 PPE – Furniture & Fixtures
1560 PPE – Leasehold Improvements

1600 ACCUMULATED DEPRECIATION & AMORTIZATION

1610 ACCUM DEPR Buildings
1620 ACCUM DEPR Machinery & Equipment
1630 ACCUM DEPR Vehicles
1640 ACCUM DEPR Computer Equipment
1650 ACCUM DEPR Furniture & Fixtures
1660 ACCUM DEPR Leasehold Improvements

1700 NON – CURRENT RECEIVABLES

1710 NCA – Notes Receivable
1720 NCA – Installment Receivables
1730 NCA – Retainage Withheld

1800 INTERCOMPANY RECEIVABLES

 

1900 OTHER NON-CURRENT ASSETS

1910 Organization Costs
1920 Patents & Licenses
1930 Intangible Assets – Capitalized Software Costs

2000 LIABILITIES

 

2100 PAYABLES

2110 A/P Trade
2120 A/P Accrued Accounts Payable
2130 A/P Retainage Withheld
2150 Current Maturities of Long-Term Debt
2160 Bank Notes Payable
2170 Construction Loans Payable

2200 ACCRUED COMPENSATION & RELATED ITEMS

2210 Accrued – Payroll
2220 Accrued – Commissions
2230 Accrued – FICA
2240 Accrued – Unemployment Taxes
2250 Accrued – Workmen’s Comp
2260 Accrued – Medical Benefits
2270 Accrued – 401 K Company Match
2275 W/H – FICA
2280 W/H – Medical Benefits
2285 W/H – 401 K Employee Contribution

2300 OTHER ACCRUED EXPENSES

2310 Accrued – Rent
2320 Accrued – Interest
2330 Accrued – Property Taxes
2340 Accrued – Warranty Expense

2500 ACCRUED TAXES

2510 Accrued – Federal Income Taxes
2520 Accrued – State Income Taxes
2530 Accrued – Franchise Taxes
2540 Deferred – FIT Current
2550 Deferred – State Income Taxes

2600 DEFERRED TAXES

2610 D/T – FIT – NON CURRENT
2620 D/T – SIT – NON CURRENT

2700 LONG-TERM DEBT

2710 LTD – Notes Payable
2720 LTD – Mortgages Payable
2730 LTD – Installment Notes Payable

2800 INTERCOMPANY PAYABLES

2900 OTHER NON CURRENT LIABILITIES

3000 OWNERS EQUITIES

3100 Common Stock
3200 Preferred Stock
3300 Paid in Capital
3400 Partners Capital
3500 Member Contributions
3900 Retained Earnings

4000 REVENUE

4010 REVENUE – PRODUCT 1
4020 REVENUE – PRODUCT 2
4030 REVENUE – PRODUCT 3
4040 REVENUE – PRODUCT 4
4600 Interest Income
4700 Other Income
4800 Finance Charge Income
4900 Sales Returns and Allowances
4950 Sales Discounts

5000 COST OF GOODS SOLD

5010 COGS – PRODUCT 1
5020 COGS – PRODUCT 2
5030 COGS – PRODUCT 3
5040 COGS – PRODUCT 4
5700 Freight
5800 Inventory Adjustments
5900 Purchase Returns and Allowances
5950 Reserved

6000 – 7000 OPERATING EXPENSES

6010 Advertising Expense
6050 Amortization Expense
6100 Auto Expense
6150 Bad Debt Expense
6200 Bank Charges
6250 Cash Over and Short
6300 Commission Expense
6350 Depreciation Expense
6400 Employee Benefit Program
6550 Freight Expense
6600 Gifts Expense
6650 Insurance – General
6700 Interest Expense
6750 Professional Fees
6800 License Expense
6850 Maintenance Expense
6900 Meals and Entertainment
6950 Office Expense
7000 Payroll Taxes
7050 Printing
7150 Postage
7200 Rent
7250 Repairs Expense
7300 Salaries Expense
7350 Supplies Expense
7400 Taxes – FIT Expense
7500 Utilities Expense
7900 Gain/Loss on Sale of Assets

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standard chart of accounts

Originally posted by Jim Wilkinson on July 24, 2013. 

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Balance the Balance Sheet

A balance sheet is a statement of the companies health. How does the liabilities and equity compare to the assets? Balancing the balance sheet is a critical part of accounting as it gives the company, bankers, and investors an idea of how the company is doing. Does the balance sheet need to balance? Yes. It always needs to balance; otherwise, it’s an indicator that either something was forgotten or there is potential fraud.

Purpose of Balancing the Balance Sheet

The purpose of balancing the balance sheet is to create a snapshot of the company’s financial status. It highlights three important categories: assets, liabilities, and shareholder’s equity. In other words, the balance sheet looks at what the company owns, how much it owes to debtors, and how much is invested.

Before we go into how to balance the balance sheet, we need to know why we need to do that. It all comes down to double-entry accounting.

An important part of the financial leader’s role is to know the economics of the company. Access our Know Your Economics Worksheet to shape your economics to result in profit.

How to Balance the Balance Sheet

Use the following formulas to calculate each categories (assets, liabilities, and equity):

Assets = Liability + Equity

Equity = Assets – Liability

Liability = Assets – Equity

First, make two columns. In the first column, list your assets. In the second column, list both your liabilities and owner’s equity. Each column should balance to one another.


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Reasons Why Your Balance Sheet Is Out Of Balance

If your balance sheet isn’t balanced, then you want to look in particular areas for inconsistencies. Some of these areas include retained earnings, loan amortization issues, paid in capital, and inventory changes.

Retained Earnings

Retained earnings can be tricky at times. After all, it is supposed to be the sum of all your net profits/losses ever since you began the business. If you have an accurate record of every number since you began, then this shouldn’t be a problem. However, a far to common problem is that some businesses do not have all the data required to calculate retained earnings. A common practice for this situation is to use retained earnings as a plug number and make it what it needs to be in order to balance the balance sheet.

Paid In Capital

Some people have misunderstanding of what “Paid in Capital” is, and one simple way to define it would be: The amount of money that was invested in the business to get you started. It can either be your own personal investment, or it can be capital contributed by investors. The sum of all initial investments should be under Paid in Capital in the owner’s equity section of the balance sheet.

Inventory Changes

One common mistake that some people forget to consider is inventory changes.  It might seem simple to just take a count of whatever inventory you have at the moment, but that may be inaccurate. If you are working towards financial projections, then you will need to predict future inventory amounts as well, and this will affect your balance sheet. A change in inventory also affects your cash flow statement. What you need to do is take the amount from last month’s inventory and subtract the amount from this month, then reduce your cash balance by that amount.

How to Protect Against Fraud With a Balance Sheet

After various global fraud scandals in 2002, the U.S Congress passed the Sarbanes-Oxley act which protected investors from the risk of fraud by corporations. It mandated strict improvements within the financial disclosures of corporations. It was responsible for the improvement of the following areas: corporate responsibility, increased criminal punishment, accounting regulation, and new protections.

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Balance the Balance Sheet

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Mistakes Manufacturing Companies Make

Mistakes Manufacturing Companies Make

Job costing, cost accounting, manufacturing costs, what does all of this mean? Oftentimes, job costing, cost accounting, and manufacturing costs are used interchangeably. As a manufacturer, it does not matter what you call it. But it is critical that as a manufacturer, you capture all of your conversion costs. Simply put, you are taking raw material and converting it to a finished good that is ready for sale. You need to capture 100% of those cost of converting the raw material. Most small companies start with the most basic bookkeeping, and that’s okay. But there are two huge mistakes manufacturing companies make that you need to avoid.

 

Eventually, you need to have proper accounting transactions and systems to capture all of those manufacturing costs to have accurate margins. Accurate financial statements and margins will allow you to correctly price your product and will allow you to make adjustments to your business. This is helpful when you have a change in prices of materials or labor, or if your volume throughput changes for whatever reason.

Mistakes Manufacturing Companies Make

In my career, I have seen two recurring mistakes manufacturing companies make that are related to accounting process, procedures and systems.

First, a company may not want to spend the time and money to improve their cost accounting and systems. As a result, this company will struggle forever. The managers of that business will not have accurate financial reports, and they will likely feel the pain when markets turn or are in a high growth situation. Remember, cash gets tight when in either a growth or decline pattern, especially if it’s not managed well.

Second, a company wants to improve the manufacturing cost accounting, but they overdo it. They want a report that tracks every penny and part, and they install a massive expensive system. Many times, they install the wrong system for their company because it was marketed as the best accounting system. This happens when companies do not spend the money to go through a system selection process. They all end up spending much more than the cost of the professional system selection and bust their budget.

Best Practices for Manufacturing Companies

As a manufacturing company, please consider the following as a best practices for your leadership to abide by.

Analysis Paralysis

You DO have to capture 100% of your costs to take raw material and manufacture a finished good. However, this does not mean you need a separate dashboard or KPI for every cost item. If it is not material and the outcome of the cost is not going to change your mind or cause you to make a business decision, then you may reconsider trying to measure it. Remember, everything you want to measure has a cost itself of measuring it. Not capturing 100% of the costs can be devastating to your company.  Remember the quote from Benjamin Franklin, “A small leak will sink a great ship.

Many business owners and financial leaders want to measure everything. But you should limit your key  performance indicators to those that will lead to business decisions! Click here to access our KPI Discovery Cheatsheet to identify those indicators that really drive value.

Margins

When you manufacture a product, you have your obvious direct materials and direct labor – measuring Cost of Goods Sold. This is absolutely crucial in a manufacturing company. But there are other costs that you need to measure. I am referring to your indirect expenses, especially your sales, general and administrative expenses. You also want to measure your gross margin and/or contribution margin and your Earnings, Before, Interest, Tax, Depreciation and Amortization (EBITDA). Consider the implementation of analyzing trends based on a trailing twelve months (“TTM”). This will help you spot trends in your business and financially lead your company. Do not forget your balance sheet. Everything ultimately affects cash and working capital.  Without cash and working capital, you will create a financial disaster. Do have KPIs for your balance sheet items that you want to measure.

Systems

Systems are an important part of having a productive and efficient accounting department. It seems that every year there is a new operating system that comes in to the market, and it seems that the developers of these systems want to expand into every market – beyond manufacturing and accounting. With all of these choices and with all of the talented sales people, you need to understand what the choices are for your business. It is worth spending the money to go through a system selection process.

Timing

Timing is everything in manufacturing. Consider the following timing of:

  • Throughput
  • Delivery of the finished good
  • When you modify your standard costs
  • How quickly you close you books and generate financial records that are accurate and serve as a tool to help you run your business
  • Collections so you have cash to place that next order of raw material

Employee Turnover

I recently quoted in a past blog that employee turnover in the U.S. has an average cost of $65,000 per year per employee lost. The number in a manufacturing environment is actually higher because there are often specialty skills that need to be acquired in manufacturing. So keeping a close watch on employee turnover is crucial in a manufacturing company.

Inventory

For whatever reason, inventory seems to be the “Achilles Heal” in many manufacturing companies. Companies either do not properly manage inventory, they have bad practices, or it just seems that it is never right. Once you establish a good process and reconcile inventory, it should be more of a maintenance routine if your people know that they are doing.  Consider the following for inventory:

Be Realistic About Inventory

Be realistic about what is obsolete inventory and good inventory. I know that companies, especially public companies hate to write off inventory.  But you are just kicking the can down the road by not dealing with it now.

Clean Up

Get rid of the junkyard! So many companies I have seen have a junkyard behind the manufacturing facility.  It has been there for years and all it does is accumulate rats, snakes and rust.  Liquidate it and get a scrap dealer to take it off of your hands. You can use that cash for door prizes at the next company party!

Stay Focused

Stick to your business and stay focused. Especially in closely held companies, some business owners waste money on the craziest things. I have saw hundreds of old mopeds (remember, these are bicycles with a weed eater motor) in the back of a large industrial manufacturer. The owner got a “great deal” on them, so he purchased them to resell. The problem is that the initial transaction happened 7 years ago. I also saw a massive specialty machine that cuts steel in the back of a pipe manufacturer because the owner thought he could open a new line of business cutting huge pieces of steel. This machine was two stories tall and weighed thousands of tons. Still to this day, I have no idea how they ever moved it. In addition, the owner never got the new line of business started because there is not a building big enough on his property. The machine has not run in 10 years.

Physical Count

Establish strict physical counts quarterly or at least annually. Have the right team of people conduct the physical count.

Adjustments

Make adjustments to your inventory, and get it over with. Write it up or down in your accounting records.

Segregate Inventory

Segregate your inventory. There is something beautiful about walking into a manufacturing facility and seeing exactly where the raw material, work in process, and finished goods are. Keep obsolete inventory in a separate area that is clearly marked off. Tag and count everything!

Hire a Good Cost Accountant

Cost accounting is a specialty area within the accounting profession. Unfortunately, not every accountant or controller knows cost accounting. Yes, hopefully most accredited accounting programs at universities cover cost accounting, but that does not mean the person you are hiring is a cost accountant. Someone with good manufacturing experience and understands cost accounting is worth his weight in gold. This person will add value to your bottom line.

In the meantime, start measuring and tracking your KPIs. Download our free KPI Discovery Cheatsheet and start tracking your KPIs today!

Mistakes Manufacturing Companies Make
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Mistakes Manufacturing Companies Make

1

Black Friday

In America, Black Friday is an event that is not only the most shopped on day during a typical year, but it also generates huge sales.

“Only in America do people trample others for sales exactly one day after being thankful for what they already have.”

~Author Unknown

Black Friday Definition

The Black Friday definition is a retail store sale that occurs the Friday after Thanksgiving – an American holiday in November. Many consider this event to be the kick-off to the Christmas shopping season. Many retailers, such as Walmart, Kohls, Kmart, Macy’s, Express, and other major retailers, open their stores in the early hours of the morning to receive the first rush of customers. Door busters, sales, huge discounts, and giveaways are all part of this event.

The History Of Black Friday

Black Friday originated in 1952 as the start of the Christmas shopping season. Because many states in the United States considered the day after Thanksgiving to be a holiday as well, retail shops realized that there were enormous amounts of potential shoppers available during this four-day weekend. But since 2005, this event has launched into record numbers for sales, shoppers, etc. For example, sales dropped for the first time since the 2008 recession in 2014. Yet, sales boasted $50.9 billion over that weekend.

Although not all states in the United States permit workers to work on national holidays or even the day after Thanksgiving, companies have broken many boundaries to take advantage of this rush of customers. Over time, retail stores and e-commerce platforms have expanded on Black Friday to include Cyber Monday. It’s become a tradition to many.

Cyber Monday

Because Black Friday became such a hit, online companies created another shopping event – Cyber Monday. It occurs the Monday after Thanksgiving and encourages shoppers to purchase more gifts and things on Monday. Originally, it was launched in 2005.

The Cost of Black Friday

While it may be tempting to join in on Black Friday specials and sales, you have to consider the cost. Remember, a sale isn’t necessarily a good sale. It has to be a profitable sale.

Some of the costs associated with Black Friday include.

How to Win on Black Friday

In order to win on Black Friday, you have to price your products for profit. Especially since you project to sell large quantities of product, you need to make sure you don’t start with a pricing problem. If you cut prices off a product that is already not profitable, then you will loose more potential profit. Before you start planning for Black Friday, make sure your pricing is in check. Click here to download our Pricing for Profit Inspection Guide.

Price for Profit During These Sales

Each sale you make has to return a profit. Therefore, you need to allocate as many costs to each good to make it easier. How much inventory do you need to push in order to turn a profit? But also, what prices are customers willing to spend? The trick with Black Friday is that since everyone is competing for the best deal, you must know what others are pricing the same product at.

Reduce DSO by Turning Over Inventory

The risk for big sales like Black Friday is that there will be some that cancel their credit card transaction for $1,800 worth of product. Because you are putting a lot of cash up front to increase inventory, you need to collect cash as quickly as possible. For example, you can offer discounts for cash only. For other pricing tips, download the free Pricing for Profit Inspection Guide to learn how to price profitably.

Black Friday

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Black Friday

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5 Ways to Prepare for Seasonality

four seasonsSeasonality can be brutal.  If your business is like ours, summertime is pretty slow.  The phones don’t ring, employees and clients are on vacation, nobody is available for appointments and not much happens in general.  Even if summertime is busy in your industry, chances are that there are other times during the year that business slows down noticeably.

5 Ways to Prepare for Seasonality

While a slower pace may sound like a dream if you’re coming off of a busy season, a slowdown can cause issues if not anticipated and planned for.  Employees out of the office can impact productivityCustomers unavailable for appointments and silent phones can mean fewer sales.   All of these factors can have a negative impact on profitability and cash flow.  Here are some steps you can take to prepare for these slow times and minimize their impact.

Consider Temporary Staffing

Some businesses do 75% of their work during 25% of the year.  This definitely makes resource management challenging.  Even if your company isn’t in an extreme situation such as this, utilizing temporary staffing can help smooth out seasonal bumps in productivity.  With staffing firms cropping up in more and more industries, the availability of temporary workers is on the rise.  While the short-term cost of these employees may be more than an in-house worker, the flexibility they provide is attractive to companies that aren’t able to carry the burden of excess staff during slow times.

Build Up Your Backlog

What happens to your sales pipeline shortly before quarterly sales bonuses get paid out?  Chances are, you see a sudden spike in closed sales.  What this seems to demonstrate is that our salespeople have some measure of control over the efforts to close their sales.  With this in mind, there are a couple of approaches you can take to ensure that there are enough sales to get you through the slow times.

First, try sitting down with your sales force with a calendar and map out your seasonality.  Awareness of the seasonal dips may be enough incentive to encourage them to build up their backlog prior to these dips.   Assuming that your sales staff will only be motivated by sales commissions, an alternative solution would be to set your bonus payout dates immediately prior to your slow times.

Keep an Eye on Your Inventory Levels

If your vendors experience the same seasonality as you do, they may not have the manpower to keep up with customer orders in a timely manner during their slow periods.  Hitting them with a last-minute rush order may not work out well and going to another vendor will likely yield the same results.  To avoid running out of key materials, make sure that items needed for planned production are ordered well enough in advance to allow for any seasonal slowdowns.

Get a Handle on Cash

During slow times, a business is likely to consume more resources than it produces.  To ensure that your business has enough liquidity to keep things running smoothly during seasonal dips, it’s important to manage cash carefully.  Here are a couple of cash management tips below. For more ideas, check out our free checklist, “25 Ways to Improve Cash Flow.”

Collect Receivables

If you and your customers are on the same sales cycle, chances are that they’ll be short-staffed at the same times you are.  Payment of payables won’t be high on the list when departments are running on a skeleton crew, so make sure that you’re current on collections before things slow down.

Prepare a Cash Flow Forecast

One of the most important steps you can take in managing cash is to prepare a cash flow forecast.  The forecast will tell you when cash will be tight. Then you can work with your banker to ensure that your company has the liquidity it needs.  On that note…

Keep Your Banker in the Loop

Chances are, you are not your banker’s only client.  They likely have many clients across several industries, so they don’t always know when business is slow for your company.  Rather than waiting for your banker to ask you why this quarter’s results don’t look as good as last quarter’s, reach out to them. Do this especially before business slows down to let them know what your projections look like.  While it may seem counter-intuitive to give your banker potentially bad news, your candor will give them confidence in you and make it more likely that they will work with you if you need it.  Besides, you’ve projected that things are going to improve, right?

Regardless of when your slow times fall, taking steps to prepare for seasonal dips can help minimize their impact on cash flow and profitability.  Now is the time to start to identify and address seasonal fluctuations.  After all, the holidays are just around the corner…

prepare for seasonality

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1

Operating Cycle Definition

Operating Cycle Definition

The Operating cycle definition establishes how many days it takes to turn purchases of inventory into cash receipts from its eventual sale. It is also known as cash operating cycle, cash conversion cycle, or asset conversion cycle. Operating cycle has three components of payable turnover days, Inventory Turnover days and Accounts Receivable Turnover days. These come together to form the complete measurement of operating cycle days. The operating cycle formula and operating cycle analysis stems logically from these.

The payable turnover days are the period of time in which a company keeps track of how quickly they can pay off their financial obligations to suppliers. Inventory turnover is the ratio that indicates how many times a company sells and replaces their inventory over time. Usually, calculate this ratio by dividing the overall sales by the overall inventory. However, you can also calculate the ratio by dividing COGS by the average inventory. Finally, the accounts receivable turnover days is the period of time the company is evaluated on how fast they can receive payments for their sales. In conclusion, the operating cycle is complete when you put together all of these steps.


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Operating Cycle Applications

The operating cycle concept indicates a company’s true liquidity. By tracking the historical record of the operating cycle of a company and comparing it to its peers in the same industry, it gives investors investment quality of a company. A short company operating cycle is preferable. This is because a company realizes its profits quickly. Thus, it allows a company to quickly acquire cash to use for reinvestment. A long business operating cycle means it takes longer time for a company to turn purchases into cash through sales.

In general, the shorter the cycle, the better a company is. Tie up less time capital in the business process. In other words, it is in a business’ best interest to shorten the business cycle over time. Try to shorten each of the three cycle sections by a small amount. The aggregate change that comes from the shortening of these sections can create a significant change in the overall business cycle. Thus, it can consequently lead to a more successful business.

operating cycle definition

See Also:
Operating Cycle Analysis

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Throughput

Throughput Definition

Throughput is the number of units of output a company produces and sells over a period of time. Furthermore, only units sold count towards throughput. Do not count units produced but not sold during the time period as throughput. The goal of a profit-seeking organization is to maximize throughput while minimizing inventory and operating expenses.

For example, let’s take a company that makes guitars. At the beginning of the fiscal period, the company has no guitars in inventory. But over the course of the fiscal period, the company makes 500 guitars. During that same period, they sell 300 guitars. So this company’s throughput for the period would be the 300 guitars produced and sold that period.

Throughput Variables

There is a formula for calculating throughput. Three variables or three components make up the formula. The three variables include the following:

  • Productive capacity
  • Productive processing time
  • Process yield

Productive capacity refers to the total number of units of output that can be produced in a given time period. Whereas, productive processing time refers to the value-added time in the production process. Then value-added time in the production process is time spent increasing the value of the end-product to the consumer. Process yield refers to the percentage of units of output that are of good quality. For example, if a guitar shop produces 100 guitars but three of them are misshapen and unusable, then the process yield for the guitar shop is 97%.

Calculate productive capacity as the total number of units the process can produce divided by the processing time. Then calculate productive processing time as processing time divided by total time available. And calculate process yield as good units produced divided by total units produced.

Throughput Formula

Use the following formula to calculate the number of units of output a company produces and sells over a period of time:

Throughput = Productive Capacity x Productive Processing Time x Process Yield 

Throughput =    Total Units    x    Processing Time    x    Good Units 
      Processing Time      Total Time    Total Units

Enhancement

You can enhance throughput by either increasing productive capacity, decreasing the processing time per unit, and/or increasing the process yield.

throughput

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throughput

See Also:

Theory of Constraints
Supply Chain and Logistics
Depreciation
Total Quality Management
Work in Progress

Source:

Barfield, Jesse T., Michael R. Kinney, Cecily A. Raiborn. “Cost Accounting Traditions and Innovations,” West Publishing Company, St. Paul, MN, 1994.

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