Welcome to this week’s 3 in 3 at 3, where we get you the three key things that you need to know for your small business in three minutes or less at three o’clock on a Monday.
Thing One: Write off Bad Debts
Thing one this week is bad debts. There’s a heap of people out there at the moment who are really struggling to pay all their bills and that’s no different for a business.
So if you’re struggling to collect a lot of the invoices that you’ve set out, then the chances are that you might have some bad debts sitting on your books. One of the key things you should be doing in the next two weeks before the end of the financial year (31st March 2025) is going through all of your receivables and understanding exactly how many of those might be bad debts because they’re usually going to be the ones that are more than 120 days or so late, maybe you’ve lost touch with them, or maybe they’ve gone bust. If you write those off as bad debts
One of the key KPIs (key performance indicators) that you should be tracking if you are having any issues with your debtors, is debtor days.
Calculating Debtor Days
Average Debtors divided by Sales multiplied by number of days in financial year equals Debtor Days.
Average Debtors = Opening Debtors plus Closing Debtors divided by two.
This KPI shows you the number of days on an average that it takes to receive payment for goods or services you have sold. The longer it takes, the greater the number of Debtor Days. Debtor days can also be referred to as your debtor collection period.
Example:
Sales $250,000
Opening Debtors $75,000
Closing Debtors $70,000
Average Debtors = (75,000 + 70,000) / 2 = 72,500
Debtors Days = 72,500 / 250,000 x 365 = 106 days
This shows that, on average, it takes 106 days for you to get paid the money you’re owed. If you are paying your creditors (the people you owe money) faster, then you’re going to be running into cashflow problems pretty quick.
Thing Two: Time to do a Stocktake and Understand your Inventory
The second thing this week is stocktakes. If you buy and sell stuff, you should do a stock take. Even if you’ve got less than $10, 000 worth of stock (or you think you do) it’s definitely worthwhile actually taking a deep dive into that and understanding exactly what you’ve bought, what’s selling, what’s stale, and what you need to clear out and get rid of.
One of the biggest mistakes we see with a lot of small business owners is that they buy way too much stock. They’ve got cash sitting in stock on shelves rather than as cash in a bank account, and you can’t pay your bills with stuff sitting on a shelf. Go through your stock, have an understanding of exactly what you’ve got.
A key KPI here for you is inventory days, which is how long it takes for something to actually sell once you buy it on average.
Calculating Inventory Days
Inventory Days = (Inventories / Cost of Sales) x 365
This shows how long it takes you to sell your stock, in other words, the number of days that cash is tied up in inventory. The lower the number, the better.
Example:
Your Inventory is $50,000
Cost of Sales is $350,000
Inventory Days = (50,000 / 350,000) x 365 = 52 days
This means that, on average, inventory sits for 52 days before being sold. To reduce your Inventory Days, review your inventory processes and identify slow-moving stock. Consider whether you should discontinue this, or only hold a display model in store and order stock on demand.
Thing Three: MBP Book Club
The third thing this week is the MBP Book Club. We launched that last week and our book this month is BBQ Economics by Liam Dann.
It’s a really good book if you want to understand exactly how the New Zealand economy works and how it interacts with the global markets, and global pressures. There’s a lot of those sorts of pressures at the moment that are going to be having a big impact. If you’ve ever wanted to know exactly how that sort of stuff is going to impact your business, then a really key thing to do is to jump on, read that book. Let us know in the comments, #MBPbookclub, any of the, economics questions that have given you a bit of a head scratcher over the years. And everybody who uses that hashtag this month goes into the draw to win a copy of the book.