Charter Capital

Tag: accounting

  • 8 Essential Considerations When Hiring a CPA

    8 Essential Considerations When Hiring a CPA

    Desk with a framed sign asking 'Do I Need A CPA?' next to a calculator, pen, and notepad, symbolizing the contemplation of hiring a CPA for business financial management.

    Hiring a CPA may not be as easy as you think. Over 300,000 accountants and auditors have left their jobs in the past couple of years, SHRM reports. This mass exodus from the field, paired with increasing demand, means it can be challenging to find a qualified professional to begin with. In addition, each CPA brings something different to the table. It’s essential to find the right professional for your needs. On this page, we’ll walk you through the basics of what a CPA can do for your business, why you might need one, and how to ensure the one you select can be truly instrumental in your business growth.

    What’s a CPA?

    Technically, just about anyone can be an accountant or work as an accounting professional. Although most have degrees in accounting, there are few requirements to provide accounting services.

    On the other hand, CPA is short for Certified Public Accountant. This designation is awarded to someone who has gone the extra mile and become licensed. Each state has different rules, though additional schooling and study in areas like auditing, taxation, and cost accounting, as well as passing a CPA exam, are typical requirements. CPAs are usually expected to engage in continuing education programs and meet additional requirements to maintain their licenses, too.

    CPA vs. Bookkeeper

    Sometimes, “bookkeeper” and “CPA” are used interchangeably, but they’re different types of professionals.

    Bookkeepers generally manage the day-to-day financial transactions of a business. This includes things like recording transactions, posting debits and credits, generating invoices, managing payroll, and maintaining and balancing ledgers and accounts.

    CPAs, on the other hand, can handle more complex tasks such as tax planning and filing, financial forecasting, and providing strategic business advice. CPAs can also represent a business in IRS dealings, which is typically beyond the scope of what a bookkeeper can do.

    Signs Your Business Should Consider Hiring a CPA

    You may not need a CPA while your business is small. However, as it grows and financial matters become more complex, hiring a CPA becomes vital. Below, we’ll cover a few signs your business is at this stage.

    • You’re dealing with complex tax situations.
    • Your business is expanding.
    • You have auditing needs.
    • You require assistance with financial planning and analysis.
    • You’re dealing with complex financial transactions, such as mergers and acquisitions.
    • You have concerns about regulatory compliance.
    • You want representation during an IRS audit.
    • You need to start delegating tasks so you can focus on business operations more.

    The Benefits of Hiring a CPA for Your Small Business

    For a small business owner, hiring a CPA brings advantages that extend far beyond routine tax filing. A CPA’s in-depth knowledge of tax laws and regulations can help your business remain compliant while identifying legitimate deductions and tax benefits you may otherwise overlook. The cost of hiring a CPA is often offset by the long-term financial savings and strategic insight they offer.

    Unlike basic tax software or a generic tax preparer, a CPA brings a broader perspective that supports year-round financial planning, not just seasonal tax return preparation. Their role in bookkeeping, understanding your business structure, and interpreting complex financial records can help reduce risk and improve decision-making.

    If your business has multiple income streams, handles personal taxes alongside business tax, or operates in a regulated industry, you may need a certified public accountant to stay ahead of changing tax code requirements. The benefits of hiring a CPA include professional guidance, improved tax compliance, and peace of mind — all crucial as you’re growing your business or managing its day-to-day demands.

    8 Essential Considerations When Hiring a CPA

    Now that we’ve covered the background, let’s dig into what to look for when hiring a CPA.

    1. Qualifications and Certifications

    The first step in vetting a CPA is to review their qualifications and certifications.

    CPA Licensure

    Confirm the professional you’re considering working with has a CPA license in the state in which your business operates. This proves they’ve passed the CPA test, understand complex accounting principles, and are familiar with ethical standards. Many states offer online portals that make it easy to verify these credentials.

    Education

    While CPAs are all required to take accounting-specific classes, degrees may differ. Moreover, a bachelor’s degree is usually the minimum requirement, and many go beyond this to secure a master’s degree in accounting, business administration, or taxation. If you’re dealing with a specific concern, working with someone with additional expertise in that area may be advantageous.

    Specializations and Certifications

    Beyond the CPA licensure, many accountants pursue additional certifications that denote expertise in specific areas.

    • Certified Management Accountant (CMA) for expertise in financial management and strategy.
    • Certified Information Systems Auditor (CISA) for those focusing on information systems audits and controls.
    • Certified Financial Planner (CFP) for expertise in personal financial planning.
    • Accredited in Business Valuation (AVB), Certified in Financial Forensics (CFF), or Chartered Global Management Accountant (CGMA) for specialized skills in valuation, forensics, or global business finance.

    Professional Memberships

    Memberships in professional organizations such as the American Institute of CPAs (AICPA), or state CPA societies can indicate the individual is committed to the profession and adherence to its ethical standards.

    2. Experience and Expertise

    Experience in your specific industry is invaluable. Different industries have unique accounting standards, tax implications, and financial challenges. For example, a CPA with a background in manufacturing will be familiar with cost accounting and inventory management practices specific to the industry. At the same time, one with expertise in technology startups might have more experience with venture capital financing and revenue recognition for software sales.

    3. Services Offered

    A good CPA can be a strong partner for your business for years to come. Because of this, you’ll want to think about your short-term and long-term objectives and ensure the services offered by any CPA you’re considering align with them. We’ll go over a few examples below.

    Comprehensive Tax Services

    Beyond basic tax preparation, a CPA offering complex tax services such as planning, consulting, and IRS representation can be a critical asset. This is especially vital if you’re dealing with a complex tax situation, trying to minimize liabilities or need guidance on tax-efficient strategies.

    Auditing and Assurance Services

    If your business requires auditing services, whether for internal purposes, compliance, or external investor relations, selecting a CPA with expertise in these areas is crucial. Assurance services add credibility to your business’s financial statements, which is essential for stakeholder confidence.

    Accounting and Financial Reporting

    A CPA that offers accounting and financial reporting services can help you ensure accuracy in your financial statements, comply with accounting standards, and provide insights for decision-making through financial analysis.

    Business Advisory and Consulting

    CPAs providing business advisory services can assist in areas such as business planning, financial forecasting, risk management, and even succession planning. This expertise is invaluable if your business is trying to grow, pivot, or navigate a transition.

    Specialized Services

    Depending on your specific challenges and goals, you may prefer hiring a CPA with specialized services, such as international taxation or forensic accounting, who can offer targeted solutions and expertise.

    Integration with Business Operations

    It is crucial to consider how well the CPA’s services can be integrated into the existing business operations. A CPA who is adaptable and capable of working with your current systems and processes can provide seamless support and more effective collaboration.

    4. Soft Skills

    Communication skills, problem-solving abilities, and attention to detail are essential. The CPA will be working closely with your team, analyzing financial data, and providing strategic financial advice. Therefore, they must be able to communicate complex information clearly and work effectively under pressure.

    5. Reputation and References

    Ask for references from previous clients, especially those in similar industries or those with similar needs to your own. This can provide insights into the CPA’s work ethic, reliability, and quality of their service.

    6. Technological Proficiency

    Given the rapid evolution of accounting software and financial technologies, a CPA’s proficiency with the latest tools and platforms can significantly enhance efficiency and data accuracy. Look for a CPA who is knowledgeable in the accounting and financial management software your business uses or skilled with advanced data analysis and forecasting tools.

    7. Availability and Accessibility

    It’s essential to have a mutual understanding of when and how the CPA will be available under different circumstances. For instance, you may be able to schedule regular financial reviews without issue, but what happens if you receive a large, unexpected order that requires quick financial assessment and decision-making? Or, what if your business experiences an emergency? Will you be able to reach them easily and in a manner that works for you both? What about connecting during tax times or other critical financial periods?

    Be sure you’re on the same page with your CPA regarding how situations like these will be handled and ask if they offer any guarantees about the level of service you’ll receive.

    8. Fees and Pricing Structure

    Understanding the fees and pricing structure of a CPA’s services is crucial for transparency and aligning financial planning with the cost of services. A few areas to consider in this regard are outlined below.

    Hourly Rates vs. Fixed Fees

    CPAs may charge by the hour or offer fixed-fee arrangements for specific services. Hourly rates are typical for consulting or advisory services where the scope of work might vary. Fixed fees are often applied to well-defined tasks such as annual tax preparation.

    Retainer Basis

    Some CPAs offer their services on a retainer basis. Where the business pays a regular, predetermined fee for ongoing services. This arrangement can be beneficial if your business requires continuous access to CPA services, as it makes costs more predictable and ensures the CPA will be available.

    Value-Based Pricing

    In some cases, CPAs may offer value-based pricing for services that provide significant value or savings to the business, such as tax planning strategies that significantly reduce your tax liability. In these cases, the fee is based on the value derived rather than the time spent.

    Additional Fees

    Be aware of any additional fees that may apply, such as charges for rush services, extra for complex transactions, or fees for using specific technologies or software. Understanding all potential fees upfront can help avoid unexpected costs.

    Comparison and Negotiation

    It’s worthwhile to compare fee structures and services offered by different CPAs. Discuss the fees with the CPA, especially if you need clarification or want to negotiate terms that fit your company’s budget and needs better.

    Strengthen Your Financial Management Strategy with Invoice Factoring

    While hiring a CPA can help you understand your finances better and leverage capital in a way that aligns with your business objectives, this is only one component of a cohesive financial management strategy. All businesses need working capital from time to time, and demand increases during periods of high growth. That’s where invoice factoring comes in. It accelerates payment on your B2B invoices, so you get the capital you need right away without taking on debt. To learn more or get started, request a complimentary rate quote. 

  • Slow-Paying Clients: 5 Strategies for Dealing with a Difficult Accounts Payable Department

    Slow-Paying Clients: 5 Strategies for Dealing with a Difficult Accounts Payable Department

    Dealing with a Difficult Accounts Payable

    Slow-paying clients have always been a concern for small businesses, but the pandemic brought concerns to a whole new level. While most small businesses have net 30 payment terms, around a quarter are now waiting 20-30 days past the due date for payment, according to a recent YouGov survey. Moreover, nearly one-third believe delinquent payments are putting their business at risk of closure.

    If your business is dealing with a difficult accounts payable department or struggling with slow-paying clients overall, these five strategies will help.

    1. Have Customer Credit Policies

    Each time you allow a customer to pay after goods or services are delivered, you’re extending them credit. Unfortunately, many businesses don’t look at it this way and extend everyone the same level of credit or don’t have policies in place to determine who qualifies for which terms. Begin by creating an established policy that includes the items outlined below.

    Who Sets the Policies

    One person on your team should be responsible for setting credit policies and maintaining written documentation. Ideally, this person will work with the team to ensure all bases are covered.

    How Pricing Overrides Are Handled

    Sales teams are often allowed some wiggle room with pricing. However, it can cause billing confusion if there are no written guidelines on who can override your regular prices, to what degree they may override them, and how overrides are documented.

    How the Extension of Credit is Handled

    Your policy should include who on your team determines the creditworthiness of each client, including how much credit each client qualifies for and how long they can wait to pay.

    The Full Approval and Denial Process

    You must have a standardized way of assessing credit risk, as all accounts should be handled the same way to avoid legal concerns and minimize the risk of bad debts.

    Policy Review Plans

    Documentation should include when the policies will be reviewed and who is responsible for evaluating and revamping as needed.

    Training

    Everyone on your team will need training on your policies to ensure they’re applied in a uniform way. Map out your training process and keep a written log of training dates.

    2. Ensure Customer Data is Complete and Accurate

    Incorrect information can result in billing and payment delays, so customer data should be confirmed with each order. Your CRM or order management software should also include the terms for each customer, including the total allowable balance they’re allowed to reach and any relevant payment terms.

    3. Implement an End-to-End Electronic Invoice and Billing System

    Going digital is essential in the modern age. For customers, this means having access to an online portal where they can view and pay their invoices when it’s convenient for them—without having to speak to an agent. They’ll appreciate it and likely pay faster.

    For the business, using an electronic system is priceless. You can automate repetitive tasks, eliminate manual entry and the errors that come with it, and free your team from having to manually process each payment.

    It’s also a good idea to reevaluate your invoicing process. Many companies only send batch statements at the start or end of the month. If you switch to sending an invoice immediately after goods or services are delivered, cash flow naturally improves. 

    4. Create an Airtight Collections Process

    Once you’re set up with a digital billing and invoice system, collections become much easier too. For example, you can automate reminders to pay, so it’s easy to let clients know when their due dates are approaching and when they’ve missed a deadline.

    Just as you’ve set up processes for determining credit and billing, you’ll want to set up collections processes too. These should include the items outlined below.

    Billing Intervals

    Consider the full timeline, including initial invoices, notices to indicate payment is due soon, and overdue notices.

    Payment Plan Requests

    Sometimes even customers who traditionally pay on time will request a payment plan. Having a written policy is good for customer relationships and can help ensure you get some of the cash trickling in. These types of arrangements are typically best handled by an accounting department, as an accountant will be in a better position to map out a plan that benefits your company without letting emotion creep in.

    Interest Accrued for Delinquent Accounts

    It’s common for a late-paying customer to pay interest or fees on overdue invoices. Identify what your charge will be and ensure it’s properly documented and shared with customers. The latter will increase the likelihood of timely payments and cover your expenses for overdue ones.

    Discounts for Early Payments

    Businesses can often speed up payments by offering a small discount for early payments or pre-payments.

    It’s worth noting that more than half of all small businesses believe their delayed payments are deliberate, per the YouGov survey. Using a mix of late penalties and early payment discounts discourages this practice.

    When to Work with Debt Collectors

    Determine in advance when it’s appropriate to hire a collection agency. Many work on a contingency basis, meaning they don’t get paid unless they collect from the customer. However, some have fees that can exceed the balance if it’s small, so you’ll need to identify the right criteria for your company and current setup.

    When to Leverage Invoice Factoring

    You may also want to incorporate invoice factoring into your collections process. Using this method, your invoice factoring company advances you most of the value of an invoice right away and then waits for payment from the customer. You’re able to use the cash in whatever way benefits your business most and the client can benefit from more relaxed terms. Working with a full-service factoring company like Charter Capital can help bridge some of the gaps in your technology and processes too, as you can benefit from free client credit reports and receive free collections services. That way, you can make more informed decisions about extending credit and are freed from chasing payments too.

    5. Have Effective Tracking and Reporting Systems in Place

    Having the right data makes it easy to see if your current processes are working for you and where issues are occurring. A few KPIs to track include:

    • Average Days Delinquent (ADD)
    • Days Sales Outstanding (DSO)
    • Percentage of Current A/R

    It’s also a good idea to track the habits of individual clients and set a threshold for the total number of allowable late payments. Because late payments cost your business money, there may be a time at which it simply doesn’t make sense to continue the relationship.

    Reduce the Strain of Slow-Paying Clients with Help from Charter Capital

    Charter Capital can provide you with same-day cash for your unpaid B2B invoices. We also offer perks like free customer credit checks and will follow up on invoices for you, plus have a digital invoicing system that makes processing a breeze. Best of all, most businesses qualify. Request a complimentary rate quote to learn more or get started.

  • 5 Reasons to Hire a Collection Agency

    5 Reasons to Hire a Collection Agency

    Accounts Receivable CollectionsWondering if it’s time to hire a collection agency? We often think of collection agencies in terms of the consumer market. For example, retail stores and credit card companies often hire a collection agency when their customers don’t pay their bills. However, professional debt collectors also work on behalf of B2B companies, such as transportation companies, manufacturers, accounting firms, and other professional service providers. So, if your business is plagued with delinquent accounts, it might be time for you to bring in a professional too.

    What is a Collection Agency?

    A debt collection agency, sometimes referred to as a debt recovery agency, is used by creditors or lenders to recover past-due receivables or accounts that have defaulted. As a business owner, you might fit the criteria for being a creditor simply because you invoice clients after you’ve delivered goods or services.

    Why Hire a Collection Agency?

    It’s essential to manage your account receivables processes in a way that ensures your clients pay promptly, your business profits, and your cash flow is strong. Unfortunately, however, sometimes clients don’t pay despite best efforts. Considering just half of all small businesses only make it five years, per the Small Business Administration (SBA), and most failures can be traced back to cash flow issues, collecting what you’re owed is vital to the survival of your business.

    But why outsource your debt collections instead of simply writing off the debt or continuing to pursue it internally? Let’s take a quick look at some of the benefits.

    1. Resources and Expertise

    Delinquent payments are a major problem for businesses. In the business services sector, for example, more than a quarter of payments are overdue, per Dun & Bradstreet’s latest report. Industries like trucking and manufacturing are roughly the same. Most tell a similar story, though a whopping 22 of the 228 industry segments studied report more than 10 percent of their past-due accounts are greater than 90 days overdue.

    That’s worrisome by itself, but the longer a payment remains outstanding, the less likely the business is to collect. On the payment due date, around 95 percent of commercial debts are collectible, per the Commercial Collection Agency Association (CCAA). At 30 days overdue, collection rates drop to 90 percent. At 60 days, collectability drops to 81 percent. At 90 days, there’s less than a 70 percent chance you’ll collect.

    Time is everything when it comes to unpaid receivables. Specialized debt recovery agencies are focused on collection, so professionals put forth extensive efforts and leverage tactics business owners might otherwise overlook. For example, they may use skip tracing to locate non-responsive debtors. Credit reporting is helpful too. Because the debtor’s credit score impacts the business’s viability, many will take care of an unpaid invoice promptly to avoid taking a hit. Legal action may be taken as well.

    2. No Collection, No Fee Service

    Many professional debt collection agencies have rules that state they don’t get paid unless they collect. So, if you’ve already exhausted your internal debt collection process, moving to a third-party agency makes financial sense. You may pay a fee on any recovered funds, but you’re still receiving a payment you otherwise wouldn’t have.

    3. Legal Protection

    There are countless regulations that govern debt collection practices, all the way from federal to state laws. They vary dramatically depending on your industry and debtors too. Because collection agencies are well versed in these laws and have policies in place to ensure compliance, hiring a professional can protect you from legal risks.

    Additionally, companies that hire a collection agency have a paper trail of their attempts to collect and how the debtor responded. This information from the collection service can prove invaluable if the case ever goes to court and may also help you recover fees. It’s also beneficial for write-offs of bad debts, as you need proof the debt is “worthless” to claim a tax deduction, according to IRS guidelines.

    4. Saves You Time

    The average small business spends 14 hours per week chasing payments, according to a recent QuickBooks survey. In similar studies, the agency found that 56 percent of business owners performed this tedious work outside their normal working hours, taking away from personal time that’s vital for work/ life balance. With professional debt collection services, you simply forward the account to your agency, and they handle all the heavy lifting, giving you and your employees all that time back.

    5. Keep Your Customer

    Customers with overdue accounts aren’t necessarily “bad” clients. They may have hit a financial snag or simply overlooked your invoice. That’s no reason to throw away a longstanding and lucrative relationship.

    The good news is collection agencies aren’t all about strongarm tactics. There’s a high degree of flexibility within the industry. Depending on your arrangement with your agency and the services they provide, you may be able to tap into an acceleration program rather than traditional debt collection. In these cases, the agency starts with firm reminders and instructions for making good on payment, thus freeing you from hours spent chasing while increasing the odds of payment and maintaining your business relationship.

    Picking the Right Collection Agency

    The debt collection industry is massive, so you have lots of choices in who to hire. As you explore your options, keep the following in mind:

    • A contingency-based agency only charges you when they collect. Going this route can save you money.
    • Fees and services vary greatly from one debt collector to the next, so compare fees, but don’t necessarily shop for the lowest price.
    • Reputation matters. Work with someone who will treat your customers well, as their service is a reflection of you.
    • Find out their typical recovery rate but remember that an unusually high or low recovery rate could be at the cost of service.
    • Choose a specialist—someone who routinely serves your industry and understands your clients.

    Accelerate Payments Through Invoice Factoring

    Invoice factoring is not an alternative to hiring a collection agency, but it can help your business accelerate cash flow by collecting your receivables faster. Moreover, factoring companies like Charter Capital will run credit checks on your clients prior to extending credit, thus reducing the risk of non-payment. Because of this, many businesses that use factoring negate the need for third-party collections, but it can also work alongside it to keep your cash flow strong. To learn more, request a complimentary rate quote from Charter Capital.

  • 7 Cash Flow Management Mistakes Businesses Should Avoid

    7 Cash Flow Management Mistakes Businesses Should Avoid

    7 Cash Flow Management Mistakes Businesses Should Avoid

    Cash flow management mistakes can throttle business growth. They’re also incredibly easy to make and can go undetected until serious issues arise. They’re one of the reasons why 90 percent of small businesses sought emergency funding during the pandemic, per the Federal Reserve Banks Small Business Credit Survey, and why even lesser cash flow problems can leave a seemingly successful business without working capital to cover payroll or purchase inventory under ordinary circumstances too.

    The goal of cash flow management is to get you in the “green,” also known as positive cash flow, where you have more money coming in than going out. Before you can work towards a positive cash flow, you need to know how much you need to earn to simply break even.

    However, you can avoid most common cash flow mistakes, so your business is prepared for unexpected expenses and has the cash it needs to grow. In this article, we’ll look at seven cash flow issues routinely seen in midsize and small businesses so that you can safeguard yours against them.

    1. Paying Too Much Attention to Profit

    While profit is a key indicator of financial strength, it’s not everything. “It is quite possible for a company to report profits but go out of business,” explains Aretha Boex of the Nebraska Business Development Center. “It is also possible for a company to be profitable and not be able to grow, secure financing, or attract investors.” With that in mind, it’s important to monitor your profit margin and business cash flow equally.

    2. Not Actively Requesting Payment of Receivables

    Sending out invoices has become such a routine activity for small-business owners that many don’t realize they’re extending credit, let alone verify the creditworthiness of customers before doing it. Start thinking of your accounts receivable as a short-term loan. Set payment terms that benefit your business. If you’re currently waiting 30, 60, or 90 days, reduce the span to days or weeks to accelerate your inflows. To speed payments further, consider adding penalties for late-payments and discounts for early payment.

    3. Not Monitoring Cash Flow Properly

    It’s hard to have effective cash flow management if you do not measure your inflows and outflows to begin with. So, if you aren’t currently using a cash flow statement to monitor your cash outflow and inflow, start now.

    Although one of your most impactful financial statements, a cash flow worksheet is easy to create. Excel even offers a free basic template to get you started, but you may want to select specialized software that can tackle your cash flow forecast as well. This is a helpful tool, as it can help you visualize how much cash you’ll have on hand at any given point in time so that you can make the most of it.

    4. Failure to Monitor Inventory Levels

    While many business owners worry about running out of inventory or not having enough to take on a large order, having an oversupply is just as worrisome. Items collecting dust on the shelf represent money that could otherwise be generating more revenue for your business either through growth activities or investments.

    Although the “right amount” of inventory to keep on hand will vary by business, industry, season, how long it takes to procure materials and other factors, you’ll generally get a feel based on historical data and regular tracking.

    5. Paying Certain Liabilities Too Early

    It’s important to pay your vendors in a timely manner for the sake of maintaining good relationships, and it’s good practice to cover general operating expenses as your terms dictate to avoid late payment penalties. Because of this, many business owners get in the habit of pushing out all upcoming payments as cash flows in. However, this creates a problem similar to inventory overstock if payments are made too early. In addition, the money you’re pushing out might be better spent elsewhere or could generate interest if invested. 

    6. Not Preparing for Slow Periods

    Seasonality impacts most businesses but manifests itself in different ways. For example, retail typically peaks in the fourth quarter. Logistics and transportation companies that support the industry often ramp up around the same time, though international shippers often see increases starting during the summer. Much focus is placed on the peak periods, but the slow periods are often overlooked.

    It’s important to remember that the income you make during a peak season needs to carry you through your slow season. You’ll need to have a surplus available to help you ramp up when the busy season kicks in again too. Effective cash flow management is paramount here. Rather than spending, you may want to find ways to put your money to work for you while ensuring it can be tapped into as employees need to be paid and expenses accrue during the slow period. 

    7.  Improperly Managing Taxes

    More than 90 percent of business owners overpay their taxes, according to Forbes research. For this reason alone, it makes sense to work with a tax professional. However, taxes are likely one of your most significant expenses and a significant source of stress, too, so even if you’re certain you’re one of the ten percent in the clear, it may be worth getting some help regardless. A specialist will help ensure your business is set up in a way that minimizes your tax liabilities and keeps you on track for deadlines throughout the year. Plus, they’ll have a wealth of business tax tips that are specific to your company so that you can keep more money in your pocket.

    Improve Your Cash Flow with Invoice Factoring from Charter Capital

    Even if you avoid all the common cash flow management mistakes, you may still find yourself short on cash from time to time. Invoice factoring can help in these situations by offering you same-day payment on your B2B receivables. Then, you can spend the cash in whatever way makes the most sense for your business while Charter Capital waits on payment from the client. Want to learn more or find out your rate? Get started with a free quote.

  • How a Cash Conversion Cycle Works & Calculating the CCC

    How a Cash Conversion Cycle Works & Calculating the CCC

    How a Cash Conversion Cycle Works & Calculating the CCC

    As a small-business owner, you’re probably keenly aware of the cash conversion cycle (CCC), even if it’s not something you’re intentionally measuring or monitoring. It’s a measure of business health and, when you’re nailing it, you’ve generally got solid cash flows and plenty of money in the bank. You’re not worried about how you’ll pay your vendors or payroll. When your CCC isn’t working in your favor, money is tight, and no amount of business growth can fix it. You’ll always be under pressure to find hidden cash and struggling to make ends meet.

    But, what is it about CCC that makes it so powerful, and how can you make it work in your favor? We’ll give you the cash conversion cycle formula, insights on what your numbers mean, and ways to improve your situation below.

    What is the Cash Conversion Cycle & How Can it Help Me?

    Also known as a net operating cycle, your CCC is calculated using several activity ratios, including those related to accounts payable, accounts receivable, and inventory turnover. You can think of CCC as the period between making an investment, usually through the purchase of inventory, and getting the return on your investment, usually through final payment from a customer after delivering a product or service. The shorter the span, the faster you’re generating cash. The longer the span, the slower you’re generating cash. Naturally, you want the length of time to be as short as possible to maximize cash on hand, but the data your CCC provides you with is far more telling than that. Although it should be incorporated with other metrics (such as return on assets (ROA) and return on equity (ROE) ), the CCC can provide valuable insights by comparing close industry competitors.

    Understanding the Impact of a Negative Cash Conversion Cycle

    A negative CCC occurs when a company collects payments from its customers before it has to pay its suppliers. This scenario is highly advantageous because it means the company is effectively using its customers’ money to fund its operations. Companies with a negative CCC, like Amazon, optimize their cash flow by turning their inventory into cash before paying for it. This process leads to a shorter cash conversion cycle, enhances overall cash management, and allows for better cash flow from sales.

    A negative CCC indicates that a company is efficiently managing its working capital, which is a crucial working capital metric. This lower CCC means that the company can reinvest the cash generated back into its operations or other profitable ventures. By continuously cycling through inventory and collecting cash faster than they need to pay suppliers, these companies maintain positive cash flow, which is essential for growth and stability. Achieving a negative CCC helps companies avoid cash being tied up unnecessarily, thereby improving their cash management and providing a competitive edge in their respective industries.

    The CCC Helps Measure the Health of Your Business

    A typical cycle may look something like this:

    Order and pay for raw materials >> Convert materials into a sellable product >> Sell the product >> Collect from the customer.

    As you know, the longer any of those stages takes, the tighter things get. You may not be able to order or pay for more raw materials because you’re still stuck waiting on payment from the customer.

    That’s the vicious cycle most small businesses and startups face. It doesn’t matter whether you’re investing $50,000 in the first step or a million. You’re always going to be stuck in limbo to the same degree if you don’t find a way to get your raw materials without paying for them right away or get your customers to pay faster. That’s why growth won’t fix a cash cycle problem and why CCC is a key indicator of your overall health.

    It’s worth noting, however, that looking at CCC by itself for a single period doesn’t give you the whole picture. You’ll want to see how your CCC is trending over time and use additional metrics to gauge your overall success too.

    You Can Evaluate Management Strength with the CCC

    Many metrics, and even intangible factors, can be used to gauge the strength of a company’s management. The CCC is one of the top options. As you can see from the earlier example, a company that isn’t converting an investment into cash swiftly is always going to need outside money to grow or bridge gaps. However, when management finds ways to speed up the CCC, cash on hand builds.

    You Can Compare Your Business Against Competitors with CCC

    When investors are choosing between two similar companies or lenders are on the fence, they’ll usually look at the CCC as well. Simply put, the company that turns an investment into cash faster will go places long before the sluggish one does. 

    Understanding the Different Elements of the CCC Calculation

    Now that you have a better background in how the CCC works and what it means to your business, let’s go over how to calculate your CCC. You’ll need access to company figures over a period of time, such as a quarter or year.

    Figures to gather include:

    • Revenue
    • Beginning Inventory Value
    • Inventory Purchases
    • Ending Inventory Value
    • Beginning Accounts Payable Value
    • Ending Accounts Payable Value
    • Beginning Accounts Receivable Value
    • Ending Accounts Receivable Value

    With these in hand, you’ll be able to work out the three elements of your CCC.

    Sample Figures

    As we break down CCC calculations in the coming sections, we’ll be working with the following sample figures of a mock company’s most recent year.

    • Revenue: $75,000,000
    • Beginning Inventory Value: $3,000,000
    • Inventory Purchases: $40,000,000
    • Ending Inventory Value: $8,000,000
    • Beginning Accounts Payable Value: $7,000,000
    • Ending Accounts Payable Value: $9,000,000
    • Beginning Accounts Receivable Value: $7,000,000
    • Ending Accounts Receivable Value: $10,000,000

    Days Inventory Outstanding (DIO)

    The first part of the CCC calculation is DIO—the average length of time it takes you to convert inventory into goods and then sell them.

    Formulas you’ll need to include:

    Average Inventory: (Beginning Inventory + Ending Inventory) / 2

    Cost of Goods Sold: Beginning Inventory + Purchases – Ending Inventory

    DIO: (Average Inventory / Cost of Goods Sold) x Number of Days in Period

    Sample DIO Calculation

    Average Inventory: ($3,000,000 + $8,000,000) / 2 = $5,500,500

    Cost of Goods Sold: $3,000,000 + $40,000,000 – $8,000,000 = $35,000,000

    DIO: ($5,500,500 / $35,000,000) x 365 = 57 days

    In this example, it takes our mock company 57 days to turn their inventory into goods and sell them.

    Days Sales Outstanding (DSO)

    The second part of the CCC calculation is DSO—the average length of time it takes to collect.

    Formulas you’ll need to include:

    Average Accounts Receivable: (Beginning Accounts Receivable + Ending Accounts Receivable) / 2

    Revenue per Day: Revenue / Number of Days in Period

    DSO: Average Accounts Receivable / Revenue Per Day

    Sample DSO Calculation

    Average Accounts Receivable: ($7,000,000 + $10,000,000) / 2 = $8,500,000

    Revenue per Day: $75,000,000 / 365 = $205,479

    DSO: ($8,500,000 / $205,479) = 41 days

    In this example, it takes our mock company an average of 41 days to collect.

    Days Payable Outstanding (DPO)

    The third and final part of the CCC calculation is DPO—the average length of time it takes you to pay your accounts payable (pay your vendors after you’ve purchased inventory).

    Formulas you’ll need to include:

    Average Accounts Payable: (Beginning Accounts Payable + Ending Accounts Payable) / 2

    Cost of Goods Sold: Beginning Inventory + Purchases – Ending Inventory

    DPO: (Average Accounts Payable / Cost of Goods Sold) x Days in Period

    Note: While we’re working with the above in this example, an alternate formula you can try is: Days Payable Outstanding = Average Accounts Payable / (Cost of Sales / Number of Days in Accounting Period)

    Sample DPO Calculation

    Average Accounts Payable: ($7,000,000 + $9,000,000) / 2 = $8,000,000

    Cost of Goods Sold: $3,000,000 + $40,000,000 – $8,000,000 = $35,000,000

    DPO: ($8,000,000 / $35,000,000) x 365 = 83 days

    In this example, our mock company waits 83 days to pay its bills.  

    The Cash Conversion Cycle Formula

    Now we’re ready to calculate the cash conversion cycle.

    DIO + DSO – DPO = Cash Conversion Cycle

    Because DIO and DSO relate to a company’s cash inflows, they’re reflected as additions, while DPO, the only cash outflow, is subtracted.

    Sample DPO Calculation

    Going back to our earlier calculations, our mock company’s CCC equation is:

    57 + 41 – 83 = 15

    It takes this company 15 days from the time it purchases inventory to collect on it.

    What is a Good Cash Conversion Cycle? Industry Benchmarks and Standards

    A good cash conversion cycle varies by industry, but generally, a shorter CCC is preferred as it indicates efficient cash flow management. The average number of days it takes a company to convert its inventory into cash, collect cash from customers, and pay its suppliers defines the CCC. In retail, giants like Walmart maintain a low cash conversion cycle, sometimes just a few days, while manufacturing industries may have longer CCCs due to extended production times.

    A good cash conversion cycle means a company can quickly turn its resources into cash flow, thereby optimizing its working capital. Industry benchmarks are useful to track the CCC and set realistic goals for improvement. For instance, a CCC of 30 days might be considered good in some sectors, whereas in fast-moving consumer goods, even a shorter cash conversion cycle is expected. Companies should aim to reduce their CCC by streamlining processes, managing inventory efficiently, and improving cash collection from customers. These improvements also enable better financial forecasting for cash flow planning and operational decisions, especially when paired with a consistently monitored CCC. This approach ensures that cash is not tied up longer than necessary, supporting better overall financial health and sustainability.

    “Good” vs. “Bad” CCC

    Over the past decade, S&P 1500 company CCC averages have climbed from about 64 to 71 days just before the pandemic per JP Morgan. Meanwhile, Goliaths like Walmart have CCCs under ten days, and Amazon manages to pull off a negative cash conversion cycle, according to Forbes. Each industry, and each company, will have unique benchmarks. Your company may not be able to whittle down your CCC to match Walmart or Amazon, but you should be actively working to improve yours and keep it as reasonably low as possible.

    How to Improve Your Cash Conversion Cycle

    Need to make a change? There are three high-impact areas you can focus on if you want to reduce your CCC.

    Using the Cash Conversion Cycle to Improve Working Capital Management

    Using the cash conversion cycle effectively can significantly enhance working capital management. The CCC formula, which calculates the number of days it takes a company to convert its investment in inventory back into cash, provides valuable insights. By analyzing the CCC, businesses can identify bottlenecks in their operations and take steps to shorten the cycle, leading to improved cash flow.

    To improve the cash conversion cycle, companies can focus on three key areas: reducing inventory days, speeding up receivables into cash, and extending payable days. Reducing inventory days means keeping less stock on hand and turning over products more quickly. Enhancing cash collection practices ensures that sales are converted into cash faster. Finally, negotiating longer payment terms with suppliers can help retain cash for a more extended period. Each of these strategies helps to lower the CCC, providing more positive cash flow for the company. Ultimately, managing its working capital efficiently through a well-optimized CCC supports the company’s financial stability and growth.

    Reduce Accounts Payable

    Payables can be addressed in two big ways. First, eliminate any account you don’t genuinely need and cut back expenses as much as possible. Secondly, connect with the suppliers you plan to keep working with and see if they’re willing to extend credit or lengthen your terms on any outstanding payments. The more days payables sit, the more you can put your money to work for you.

    Boost Accounts Receivable

    Explore ways to get your customers to pay faster. Changing your invoicing terms, offering rewards for early payment or pre-payment on an account receivable, and factoring your unpaid B2B invoices can help.

    Reduce Inventory

    Keeping inventory days on end without use is a major CCC killer. You probably won’t get what your inventory is worth through liquidation, so it’s better to hold off on restocking until you absolutely need to order and focus on keeping minimal inventory on hand instead.

    Improve Your CCC with Factoring

    If your business needs to speed up payments and free working capital, you can sell your unpaid B2B invoices to a factoring company and get cash in hand in as little as a day. Get started with a complimentary quote from Charter Capital.

  • Here Comes the Tax Man – Six Tips to Get Ready for the Big Day

    Here Comes the Tax Man – Six Tips to Get Ready for the Big Day

    Should five per cent appear too small
    Be thankful I don’t take it all
    ‘Cause I’m the taxman, yeah I’m the tax man
    Tax Man (Beatles, 1966)

    Taxes for small businesses

    Few people celebrate April 15. No one sits around the table to carve turkeys and watch football. There aren’t any fireworks displays and ice cream socials. Santa Claus doesn’t come down a chimney and leave any presents.

    Quite the opposite happens on April 15… that’s when the Tax Man comes and takes away.

    We all know taxes are a necessary part of living in a free and democratic society. You don’t get something for nothing, not even in America. Someone has to pay for the roads, the national parks and the aircraft carriers. And that someone is you and me. But with apologies to the Beatles, the Tax Man doesn’t have to take it all. Just because taxes are necessary, that doesn’t mean there aren’t things you can do to lessen your bill when it comes due. 

    1) Organization Saves Time… and Often, Money

    Here are six helpful tips you may want to consider when preparing your taxes. Of course, Charter Capital is not a tax service and we don’t give tax advice. Consult your tax attorney for information regarding your specific situation.

    Believe it or not, throwing receipts and other important documents into a cluttered drawer or file folder and then forgetting about them until April 14 is not a good idea. A better one is to stay organized. Each time you have new receipts or documentation, carefully file them by topic that day rather than waiting for them to pile up. When your tax files are organized, it saves valuable time for the tax preparer (especially if that tax preparer is you). Organized files and complete documentation can also help you better take advantage of eligible tax incentives you may otherwise miss because you can’t find the needed receipts or papers. Finally, it can make tax preparation easier, faster and less frustrating, lessening the possibility of having to file an extension or having to pay late fees because you or your preparer couldn’t complete the task in time.

    2) Pick the Right Entity for your Business

    Just because you own and operate a small business doesn’t mean you can’t take advantage of an entity change. Big businesses aren’t the only ones with the fancy abbreviations at the end of their names. If you currently file as a sole proprietor, consider switching to an LLC. Doing so may enable you to eliminate some of the self-employment tax and several other benefits.

    3) New, Larger Equipment Deductions May Cut Your Tax Bill

    Recent tax law changes now offer bigger deductions for equipment purchases. Small businesses are now eligible for federal tax deductions of up to $1 million – nearly twice the previous amount. If you’ve purchased new or used equipment for your business and placed it into service before the end of the year, you may be entitled to this deduction. The new tax laws also offer two additional breaks for small businesses. One is a 100 percent bonus depreciation deduction for certain types of equipment bought and placed into service after Sep. 27, 2017. The other is a 40 percent bonus deduction for certain types of equipment purchased before Sep. 28, 2017 and put into service during 2018. To see if you qualify, check with your tax attorney or the IRS. Speaking of that…

    4) Don’t Be Afraid to Ask the IRS for Help

    Most people would understandably not be thrilled were an IRS agent come knocking on the door. But, believe it or not, the IRS does try to help taxpayers and offers many tax preparation tools of which you may not be aware. The agency has many self-help topics online here. The site also discusses many of the new tax laws and how they may affect your business here. It would certainly be worth a few moments of research to look over these webpages before starting your taxes. You may find information on deductions that could be of great benefit and savings.

    5) Donate Unused Inventory – Clean Out the Warehouse and Cut Your Taxes

    One often overlooked and easy to take advantage of deduction is to donate unsold and unused inventory. Donating inventory helps two groups at the same time. First, a charitable organization gets free items to help them in their mission. Second, you save money by no longer having to pay to store the items and you can get a tax break. Do note that donations of good worth more than $500 have stringent reporting rules you must follow.  

    6) Procrastination Never Pays Off – Don’t Wait to Start Your Taxes

    If you’re the type of person who thinks you work best under a tight deadline, you may be doing yourself a disservice by waiting until the last minute to start preparing your taxes. Unless you use the EZ form (and who does that for a business), filling out tax forms takes time, patience and concentration. If you start late, you may learn to your horror you can’t find a needed document and may not find it on short notice. You also may be more prone to mistakes, such as mathematical errors to forgetting to take advantage of a tax benefit for which you qualify. Finally, you may not be able to finish in time, which could lead to late penalties. The best advice is to follow the Boy Scout motto – Be Prepared – and give yourself plenty of time to do the job… and do it right.

    Usually on April 15, you’re the one giving. But for this tax season, here’s something just for you: a bonus tax tip to help you ensure you’re getting the maximum benefit for your buck.

    7) Get a Handle on Your Cash Flow to Estimate Your Taxes Ahead of Time

    One way to better prepare for taxes is to forecast your cash flow. Doing so allows to estimate taxes ahead of time and anticipate eligible deductions. Build a model of your accounts receivable and accounts payable. Factor in your annual budget and anticipated sales. This will help you not only at tax time, but in developing a forecast you may also find it easier to run your business so that it will grow and prosper.

    A good way to improve your cash flow, whether at tax time or any time of the year, is invoice factoring. This method of cash flow recovery allows you to “sell” your accounts receivable invoices to a factoring company. This company pays you upfront for the outstanding invoices by giving you the cash you need today and eliminating the worry and hassle of slow paying collections. This leaves you free to run your business.

    Invoice factoring is a convenient alternative to a traditional bank loan or fee-laden online loans and risky crowdfunding. Each of these sources require a long-term contract. Factoring, however, gives you the money you need when you need it with no long-term obligations. You can also get cash quicker through invoice factoring – usually within a day or two.

    If you would like to learn more about how invoice factoring works, simply call toll-free 1-877-960-1818 or email [email protected].

    * Although we are pretty much experts in small business finance, Charter Capital does not provide tax or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax or legal advice. You should consult your own tax and legal advisors before engaging in any transaction.