Financial Planning & Analysis (FP&A) Archives : Planergy Software Tue, 02 Jul 2024 16:32:56 +0000 en-US hourly 1 https://wordpress.org/?v=6.6 https://planergy.com/wp-content/uploads/2021/07/Planergy-Symbol-150x150.png Financial Planning & Analysis (FP&A) Archives : Planergy Software 32 32 The Future of FP&A: How The Role Is Evolving With The Use Of Real-Time Data https://planergy.com/blog/future-of-fp-a/ Mon, 25 Dec 2023 16:17:12 +0000 https://planergy.com/?p=15603 KEY TAKEAWAYS The FP&A function has always been vital to business success – and advancements in the field have made it easier for operations to grow without disruptions. Gone are the days when you must rely on historical data and make reactive decisions. Thanks to AI and other tools, you can now make better decisions… Read More »The Future of FP&A: How The Role Is Evolving With The Use Of Real-Time Data

The post The Future of FP&A: How The Role Is Evolving With The Use Of Real-Time Data appeared first on Planergy Software.

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What's Planergy?

Modern Spend Management and Accounts Payable software.

Helping organizations spend smarter and more efficiently by automating purchasing and invoice processing.

We saved more than $1 million on our spend in the first year and just recently identified an opportunity to save about $10,000 every month on recurring expenses with Planergy.

King Ocean Logo

Cristian Maradiaga

King Ocean

Download a free copy of "Indirect Spend Guide", to learn:

  • Where the best opportunities for savings are in indirect spend.
  • How to gain visibility and control of your indirect spend.
  • How to report and analyze indirect spend to identify savings opportunities.
  • How strategic sourcing, cost management, and cost avoidance strategies can be applied to indirect spend.

The Future of FP&A: How The Role Is Evolving With The Use Of Real-Time Data

The Future of FPA

KEY TAKEAWAYS

  • The FP&A function has always been vital to business success – and advancements in the field have made it easier for operations to grow without disruptions.
  • Gone are the days when you must rely on historical data and make reactive decisions. Thanks to AI and other tools, you can now make better decisions with real-time data.
  • Staying up-to-date with current industry trends will help you remain relevant and valuable as a team member, no matter your organization.

Financial Planning & Analysis (FP&A) is critical in every organization.

It is the driving force behind financial decision-making, providing essential insights that guide strategic planning and budgeting.

But what exactly is FP&A, and how is it evolving with the advent of real-time data? Let’s delve into the details.

Understanding FP&A

It’s a role within the finance department that involves budgeting, forecasting, and analyzing a company’s financial reports and metrics.

Often accounting ratios and formulas are used to measure performance of finance KPIs over time.

FP&A helps create a data-driven culture in a company. Research shows that data-driven organizations outperform their competitors.

FP&A professionals are responsible for understanding the financial implications of business decisions and providing strategic recommendations.

The role of FP&A includes:

  • Preparing Budgets and Forecasts

    One of the primary responsibilities of FP&A professionals is preparing budgets and forecasts.

    They work closely with various departments to understand their financial needs and project future expenses and revenue.

    This process involves analyzing historical data, understanding market trends, and making informed assumptions about future performance.

  • Analyzing Financial Performance

    FP&A analysts play a critical role in reviewing and interpreting financial results.

    They scrutinize the company’s income statement, balance sheet, and cash flow statement to understand its financial health.

    This analysis aids in identifying patterns, understanding variances between actual and projected figures, and highlighting areas of concern or opportunity.

  • Evaluating Business Performance

    This includes tracking key performance indicators (KPIs), conducting variance analysis, and providing regular financial reports to management.

    By doing so, FP&A professionals help ensure the company is on track to meet its financial objectives and can quickly identify and address any issues hindering progress.

  • Providing Actionable Insights

    FP&A professionals don’t just crunch numbers; they provide actionable insights influencing strategic decision-making.

    They use their understanding of finance and business operations to interpret complex data and make recommendations on cost savings, profitability improvement, and strategic investments.

    Using finance business intelligence data, their insights can directly impact a company’s bottom line and drive its strategic direction.

The role of fpa includes

So, is FP&A a good career?

Absolutely. It offers a unique blend of strategic thinking, data analysis, and communication skills.

While challenging, it offers immense job satisfaction and career growth.

Pros and Cons of FP&A

Benefits of Working in FP&A

  • High Demand for Skilled Professionals

    One of the major advantages of pursuing a career in FP&A is the high demand for skilled professionals in this area.

    According to the U.S. Bureau of Labor Statistics (BLS), the estimated growth in the field from 2021-2031 is 9%, which is faster than average.

    As businesses increasingly recognize the importance of strategic financial planning and analysis, the need for knowledgeable FP&A practitioners continues to grow.

  • Flexibility and Autonomy

    Working as an FP&A contractor or consultant can offer great flexibility and autonomy.

    This can be an attractive prospect for those who value independence and prefer to have control over their work schedules and projects.

  • Growth and Learning Opportunities

    FP&A roles provide ample opportunities for growth and learning.

    Professionals in this field are constantly exposed to various aspects of the business, allowing them to broaden their understanding and hone their skills.

  • Stability

    FP&A is one of the most stable job fields due to the constant need for financial planning and analysis, regardless of whether a business is struggling or thriving.

    Benefits of working in fpa

Challenges of Working in FP&A

  • Accessing Real-Time, Accurate Data

    A significant challenge facing FP&A teams today is accessing real-time, accurate data.

    Without this crucial information, finance teams may struggle to make informed decisions, leading to inefficiencies and missed opportunities.

  • Uncertainty

    Working as an FP&A contractor or consultant can also come with a degree of uncertainty.

    The nature of contract work can mean periods without assignments and a lack of job security.

    You can counteract this uncertainty by aiming to work directly with a specific company as an employee rather than as a contractor.
    However, doing so also means a potential loss of schedule flexibility.

  • Pressure and Stress

    The FP&A role can be stressful, given the responsibility of forecasting and budgeting.

    These tasks require dealing with multiple data sources, assumptions, scenarios, and stakeholders, all while facing tight deadlines, changing expectations, and market volatility.

    Challenges of working in fpa

How Working in FP&A Used to Be

Before technology made it possible to process massive amounts of data in minutes, FP&A required manual data processing, which was labor-intensive, time-consuming, and riddled with error potential.

  • Limited Software

    As great as they are for many things, spreadsheets were the only thing finance teams had to track crucial financial data and performance over time.

    Sure, adding, subtracting, multiplying, and performing fairly complex math equations was easy, but inputs could only be edited by one person at a time – and you never knew if you had access to the most up-to-date information.

    Using the best business budgeting software and procure-to-pay software with powerful reporting and analytics functionality, like Planergy, gives FP&A the tools they need to give actionable insights.

    If you were working with an older file version, your work could be wasted. Spreadsheets lack advanced capabilities to deliver critical insights for strategic and operational planning.

  • Reliance on Historical Data

    Finance professionals had no choice but to rely on past data and performance to find trends and patterns on which to base the path forward.

    While looking in the rearview was certainly better than having no data at all to support any decisions, that left many companies blindsided by sudden changes in the business landscape or industry trends.

    Can you imagine trying to predict tomorrow’s weather based on what happened yesterday? That’s pretty much what it was like.

  • Siloed Decision-Making

    Without the ability to share information in real-time, with a cloud-based platform like we have today, the planning process was often handled in isolation.

    With minimal cross-functional collaboration across departments, finance leaders were stuck making decisions based on the information at hand, regardless of what other information may be available.

    Imagine only having a few pieces of the puzzle but trying to make sense of the full picture.

  • Reactive Analysis

    Making decisions based on past data meant companies couldn’t quickly adapt to changes and properly seize new opportunities. This meant companies were always one step behind.

    Historic challenges of working in fpa

The finance transformation is one of many industries affected by the advent of new technology.

The Digital Transformation of FP&A

Today FP&A, and finance more generally, is undergoing a significant transformation driven by digital technology and the availability of real-time data.

Traditionally, FP&A relied on historical data and manual processes.

However, the digital revolution has ushered in a new era where real-time data and advanced analytics tools are reshaping the field.

Real-time data allows FP&A professionals to monitor business performance in real-time, carry out trend analysis to identify trends early, and make proactive decisions.

For example, real-time spend analytics like those available in Planergy provides instant visibility into expenditure, enabling better spend control and strategic decision-making.

However, the digital transformation of FP&A is not without its challenges.

The need for accurate, real-time data for strategic decisions is paramount, but achieving this can be difficult given data silos, data quality issues, and the complexity of integrating various data sources.

The Future of FP&A

The future of FP&A lies in its ability to harness the power of technology and data.

As artificial intelligence and machine learning become more prevalent, they will further automate the FP&A process, allowing for even more precise and timely insights.

  • Automated Data Analysis

    Imagine if FP&A teams could harness the power of automation to turbocharge their data analysis of big data.

    No more tedious data collection and processing – just pure, high-quality insights and strategic recommendations.

    This isn’t some far-off fantasy; it’s the future of FP&A. Utilizing big data in finance efficiently to draw good insights is possible and getting easier with improvements in technology.

    Brace yourself for an efficiency-boosting, quality-enhancing automation revolution.

  • Leveraging AI and Advanced Software

    Cutting-edge software solutions will power the FP&A of tomorrow.

    These pioneering technologies promise a new era where FP&A teams can easily sift through massive datasets, spot patterns, and generate predictive analytics.

    AI in Procurement, AI in Accounts Payable, automated spend analysis, and even spend forecasting are now becoming a reality for even smaller businesses.

    We’re already witnessing the dawn of this transformation, with FP&A teams mastering tools like ChatGPT for Excel and Microsoft’s Copilot.

    As these pros continue to exploit advanced software and AI, they’ll unlock unprecedented accuracy and detail in their analysis, arming organizations to make data-driven decisions with renewed confidence.

  • Real-Time Data Insights

    In the fast-paced world of business, having up-to-the-minute information is crucial. That’s why the FP&A teams of the future will embrace real-time data insights.

    This shift promises faster, better-informed decision-making. With a constant stream of real-time data, FP&A professionals can monitor performance and adjust forecasts on the fly.

    The result? A nimbler, more proactive FP&A team that fuels strategic growth and sharpens competitive edges.

  • Collaboration Across Multiple Teams and Departments

    The FP&A role of the future will pivot on collaboration and cross-functional teamwork.

    By dismantling the silos that once hindered knowledge-sharing, FP&A teams can align strategies more effectively and ensure stakeholders have the critical intel they need.

    This collaborative approach promises a more unified, agile organization, ready to seize opportunities and tackle challenges head-on.
    With strong cross-functional team leadership the future is bright for FP&A.

  • Proactive and Strategic Planning

    The future of FP&A is about shifting from reactive to proactive and strategic planning.

    Armed with advanced tools, automation, and real-time data insights and dashboards, FP&A teams will be able to:

    • Anticipate changes in the business landscape
    • Identify opportunities
    • Develop contingency plans

    This forward-thinking approach will empower organizations to make strategic decisions, giving them the upper hand in a fiercely competitive market.

The future of fpa

The Future of FP&A Has Already Started

The future of FP&A is here, and it’s nothing short of revolutionary.

Working with this FP&A transformation is a much different beast compared to what it was just a few years ago.

Automation and technology have opened up endless possibilities and potential for businesses.

Now, businesses can quickly process data, anticipate trends, and make informed decisions around finances that can ensure long-term security.

And, when combined with the skill sets of knowledgeable finance professionals and leaders, there are almost no limits to what can be accomplished today through FP&A.

For those looking to become experts in the field of FP&A or for those who already are critical members of financially thriving companies – the power of modern technology should not go understated as it has revolutionized an entire industry virtually overnight.

What’s your goal today?

1. Use Planergy to manage purchasing and accounts payable

We’ve helped save billions of dollars for our clients through better spend management, process automation in purchasing and finance, and reducing financial risks. To discover how we can help grow your business:

2. Download our “Indirect Spend Guide”

Download a free copy of our guide to better manage and make savings on your indirect spend. You’ll also be subscribed to our email newsletter and notified about new articles or if have something interesting to share.

3. Learn best practices for purchasing, finance, and more

Browse hundreds of articles, containing an amazing number of useful tools, techniques, and best practices. Many readers tell us they would have paid consultants for the advice in these articles.

Related Posts

The post The Future of FP&A: How The Role Is Evolving With The Use Of Real-Time Data appeared first on Planergy Software.

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Days Sales Outstanding: What Is It and How To Calculate It https://planergy.com/blog/days-sales-outstanding/ Fri, 22 Dec 2023 15:27:12 +0000 https://planergy.com/?p=15592 IN THIS ARTICLE What Is Days Sales Outstanding? What Is the Formula for Days Sales Outstanding? How Do You Calculate DSO? Is a Higher or Lower Days Sales Outstanding Ratio Better? What is the Average Days Sales Outstanding for a Company? What Are the Benefits of Calculating Days Sales Outstanding? What Is the Relationship Between… Read More »Days Sales Outstanding: What Is It and How To Calculate It

The post Days Sales Outstanding: What Is It and How To Calculate It appeared first on Planergy Software.

]]>

What's Planergy?

Modern Spend Management and Accounts Payable software.

Helping organizations spend smarter and more efficiently by automating purchasing and invoice processing.

We saved more than $1 million on our spend in the first year and just recently identified an opportunity to save about $10,000 every month on recurring expenses with Planergy.

King Ocean Logo

Cristian Maradiaga

King Ocean

Download a free copy of "Indirect Spend Guide", to learn:

  • Where the best opportunities for savings are in indirect spend.
  • How to gain visibility and control of your indirect spend.
  • How to report and analyze indirect spend to identify savings opportunities.
  • How strategic sourcing, cost management, and cost avoidance strategies can be applied to indirect spend.

Days Sales Outstanding: What Is It and How To Calculate It

Days Sales Outstanding

Ask any business owner, and they’ll tell you that of all the things needed for a business to survive, the most important one is cash.

Even if your financial statements show a healthy bottom line, if cash flow isn’t consistent, the odds of your business surviving drop.

But how do you know how much cash to expect? 

While smaller businesses may be able to predict incoming cash, it’s an impossible task for larger businesses with hundreds or even thousands of customers.

That’s why many CFOs and accounting managers use Days Sales Outstanding to determine how quickly their customers pay their invoices.

What Is Days Sales Outstanding?

Days Sales Outstanding or DSO is an accounting ratio used to determine how quickly your credit customers pay you by measuring the average number of days that it takes to receive payment.

Similar to the accounts receivable turnover ratio, businesses can measure their DSO monthly, quarterly, or yearly, though a yearly calculation may not be frequent enough for businesses with a high number of credit sales.

This metric can be particularly helpful for newer businesses or businesses that have limited cash flow since it can alert business owners to potential cash flow issues.

Before we calculate DSO, let’s review some accounting terms that are directly related to DSO.

  • Accounts Receivable

    Accounts receivable are what is owed to you by customers that have purchased goods or services from your company on credit.

    While a healthy accounts receivable balance is good for your net income or bottom line, if you’re not regularly collecting on those customer balances, your cash flow will suffer.

  • Cash Conversion Cycle

    The cash conversion cycle, or CCC, measures the time it takes to convert inventory and supplies into cash.

  • Cash Flow

    Cash flow is the amount of money that flows into and out of a business. Monitoring cash flow is particularly important for businesses that have a traditionally low cash flow balance.

  • Credit Sales

    Credit sales are sales made to customers with specific terms attached. Once customers qualify for credit, they are provided with specific payment terms that they must adhere to including a due date.

All of these terms play an essential role when determining your company’s DSO.

What Is the Formula for Days Sales Outstanding?

Days sales outstanding are calculated by dividing the total accounts receivable for the time period by the total credit sales for the period, divided by the number of days in the period.

This total is then divided by the number of days in the period in which you calculate DSO.

For instance, if you’re calculating DSO for the month of July, the total number of days would be 31.

(Average Accounts Receivable / Total Credit Sales) x Number of Days in Period

Days sales outstanding formula

Below are step-by-step instructions for calculating DSO.

How Do You Calculate DSO?

The DSO formula is simple, though there are some preliminary steps that will need to be completed before calculating.

  1. Determine the Given Period of Time You Wish To Include

    Some businesses may find it sufficient to calculate DSO quarterly, but for businesses with a high volume of sales, a monthly calculation may be more helpful.

  2. Calculate the Average Accounts Receivable for the Chosen Period

    The easiest way to calculate your average accounts receivable balance is to refer to your beginning and ending AR balance for the period you’re calculating.

    For example, if you’re calculating DSO for the first quarter of 2023, you would obtain your January 1 AR balance and your March 31 AR balance from your balance sheet.

    Once you have those balances, you’ll just add them together and divide them by two.

    Let’s say your January 1 balance was $750,000 and your March 31 balance was $850,000. You’ll add those two together and then divide it by two to find your average AR balance for the period.

    ($750,000 + $850,000) / 2 = $800,00 Average Accounts Receivable

    Knowing your average AR balance allows you to move on to the next step.

  3. Calculate Net Credit Sales for the Period

    You can obtain your net credit sales from your income statement.

    Though you may offer various payment methods for your customers, you’re only using credit sales in the calculation since cash sales have a DOS of zero.

    Let’s say that your gross credit sales for the quarter were $195,00, with returns of $15,000, and discounts of $10,000.

    To calculate net credit sales, you’ll use the following formula:

    Gross Credit Sales – Returns – Discounts – Allowances = Net Credit Sales

    $195,000 – $15,000 – $10,000 = $170,000 Net Credit Sales

  4. Calculate the Number of Days in the Period

    To complete the DSO calculation, you’ll need to know the number of days for the period. If you’re calculating the first quarter of 2023, your days would be:

    • January – 31
    • February – 28
    • March – 31

    That gives you a total of 90 days for the quarter

  5. Calculate DSO

    Using all of the numbers from steps 2 through 4, you can now calculate DSO for your business using the days sales outstanding formula.

    ($80,000 / $170,000) x 90 = 42 days

    The result means that it’s taking your business an average of 42 days to collect payment on outstanding credit sales.

    Step by step instructions for calculating dso

But what does that result mean?

Is a Higher or Lower Days Sales Outstanding Ratio Better?

Knowing how to calculate your DSO is an important first step in managing your business finances, but it’s vital that you understand the results of your calculation.

Is a higher or lower result better? Let’s explore both.

  • Low DSO

    On the surface, a low DSO means that you’re collecting payment on your credit sales quickly.

    But digging a little deeper, a lower number also points to a more efficient vetting of your customer’s creditworthiness, as well as a good collections process.

    However, a low number does not always equate with efficiency. An abnormally low number can also point to a too stringent credit policy, where the company is only selling on credit to a very limited number of customers.

  • High DSO

    A high DSO indicates that it’s taking longer to collect money from credit customers. That can be due to a number of reasons including offering credit to poorly qualified customers.

    A higher DSO can also indicate that the proper collections procedures are not in place. However, a higher DSO can also mean that you’re offering your customers more generous credit terms, making them unlikely to pay early.

    No matter the result, it’s essential to consider all of these factors when calculating your DSO before you determine whether it needs to be improved.

What is the Average Days Sales Outstanding for a Company?

According to the National Summary of Domestic Trade Receivables Summary results for the first quarter of 2023, the average days sales outstanding across all industries is 38.86.

This means it’s taking almost 39 days on average for a company to collect on its accounts receivable.

What is the average days sales outstanding for a company

However, different industries do not have the same average DSO, which is why it’s important to only compare your DSO results to those of similar companies.

The following is a sample of the average DSO benchmark per industry.

IndustryAverage Days to Collect on Credit Sales
Food Services26 Days
Furniture & Fixtures35 Days
Business Services37 Days
Printing & Publishing43 Days
Computer Equipment45 Days
Manufacturing45 Days

Average dso benchmark per industry

This is just a brief sample of how DSO can vary between industries.

What Are the Benefits of Calculating Days Sales Outstanding?

If you offer credit terms to your customers, it’s vital that you know how quickly they’re paying their debt, which DSO can do.

Regularly tracking DSO results can also provide insight into other important areas of your business such as cash flow and customer satisfaction.

DSO can also signal a potential issue in your accounts receivable processes such as the lack of prompt follow-up on past due invoices and flagging of customers that always make late payments.

What Is the Relationship Between DSO and Profitability?

Your DSO can directly impact both cash flow and profitability.

Cash flow is directly impacted by a high DSO, since the longer a debt remains on the books as an accounts receivable balance, the less cash you’ll have flowing into your business, which can result in cash flow problems.

With a lower DSO, your customers are paying you quickly, increasing the amount of your company’s cash flow.

DSO also impacts profitability as well. In many cases, the longer an accounts receivable balance remains on your books, the more difficult it becomes to collect on it.

Once a debt become uncollectable, it’s usually written off as bad debt, which can negatively impact your profit margin.

How Can You Lower Your DSO?

If your days sales outstanding is too high, there are some steps you can take to lower it.

  • Measure It Against Similar Companies

    Before you begin reviewing accounts receivable processes, it’s important that you measure your results against those of similar companies.

    For example, if you’re in an industry that has an average DSO of 50 and yours is 47, then even though it’s higher than the average DSO of 38, it’s still in the normal range for your business.

  • Focus on Customers

    In most cases, a high DSO starts with your customers. Is your credit department adequately screening customers before offering them credit? Are the credit terms a good fit for them?

    While there can be a problem with lax credit standards, you can also go too far and stop offering credit to all but the most stellar customers, with either stance likely to hurt your business.

  • Review Payment Processes

    Are you giving your customers enough ways to pay? If the only way to pay an invoice to your company is by sending in a check, you’re more likely to wait for that payment.

    Providing your customers with incentives to pay early and easily can quickly lower your DSO.

  • Review Invoicing Processing for Delays

    Timely invoicing plays an important role in getting paid on time. If your sales department is slow in invoicing customers, or sending invoices with errors, there will be delays in receiving payment.

    Do a thorough assessment of your billing department and make sure that invoices are sent to customers promptly.

  • Have a Clear Policy on Collections

    There should be set guidelines in place for the proper handling of unpaid invoices, including establishing a collection period.

    Guidelines should include when a customer should be contacted regarding payment, when to set up a payment plan, and when the balance should be turned over to collections.

    These guidelines should also include details on handling an uncollectible balance.

How to lower your dso

How Do You Use Days Sales Outstanding To Calculate Cash Flow Conversion?

Aside from calculating days sales outstanding as a way to measure debt collection, the metric is also used when calculating the cash conversion cycle or CCC.

A more in-depth metric, the CCC measures the time it takes to purchase goods or materials, turn them into a saleable product, sell the product, and collect the payment from the sales.

The cash conversion cycle first measures Days Inventory Outstanding, which is measured similarly to DSO, only using inventory totals instead.

The formula for calculating DIO for the first quarter of 2023 is:

(Average Inventory / Cost of Goods Sold) x 90 days = Days Inventory Outstanding

Days inventory outstanding formula

You’ll also have to calculate Days Payable Outstanding or DPO, which measures the amount of time it takes to pay your suppliers and vendors.

You’ll use the beginning and ending accounts payable balances to calculate your average accounts payable, which is needed to complete the calculation.

The formula for calculating DPO for the first quarter of 2023 is:

(Average Accounts Payable / Cost of Goods Sold) x 90 = Days Payable Outstanding

Days payable outstanding formula

Now that you have DIO, DSO, and DPO totals, you’re ready to calculate the cash conversion cycle.

Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) – Days Payable Outstanding (DPO) = CCC

Cash conversion cycle formula

While measuring DSO provides needed insight into accounts receivable process efficiency, CCC measures efficiency across business operations.

Should You Calculate the DSO Value for Your Business?

The DSO ratio is one of the simplest accounting ratios to calculate. Various profitability ratios, liquidity ratios, activity ratios, and solvency ratios have their own benefits to calculate regularly.

Knowing and understanding your days sales outstanding metric can give you better insight into company performance and financial health.

It can also help you evaluate the current efficiency of your accounts receivable and credit department.

Using automation is the best way to calculate your DSO, though you can also use Microsoft Excel to calculate it manually. Whichever way you use, there’s no good reason not to calculate your DSO.

What’s your goal today?

1. Use Planergy to manage purchasing and accounts payable

We’ve helped save billions of dollars for our clients through better spend management, process automation in purchasing and finance, and reducing financial risks. To discover how we can help grow your business:

2. Download our “Indirect Spend Guide”

Download a free copy of our guide to better manage and make savings on your indirect spend. You’ll also be subscribed to our email newsletter and notified about new articles or if have something interesting to share.

3. Learn best practices for purchasing, finance, and more

Browse hundreds of articles, containing an amazing number of useful tools, techniques, and best practices. Many readers tell us they would have paid consultants for the advice in these articles.

Related Posts

The post Days Sales Outstanding: What Is It and How To Calculate It appeared first on Planergy Software.

]]>
Budgeting In UK Schools: MAT, Academy Budgeting Challenges and Best Practices https://planergy.com/blog/budgeting-in-schools-mats-academies/ Tue, 12 Dec 2023 14:59:45 +0000 https://planergy.com/?p=15550 KEY TAKEAWAYS School finance is complex, and budget monitoring is important to prevent overspending. Even using last year’s data to support the current year for your current budget may lead you astray without close monitoring, as factors change over time. Following best practices and facing challenges head-on can help. Understanding School Budgets A school budget… Read More »Budgeting In UK Schools: MAT, Academy Budgeting Challenges and Best Practices

The post Budgeting In UK Schools: MAT, Academy Budgeting Challenges and Best Practices appeared first on Planergy Software.

]]>

What's Planergy?

Modern Spend Management and Accounts Payable software.

Helping organizations spend smarter and more efficiently by automating purchasing and invoice processing.

We saved more than $1 million on our spend in the first year and just recently identified an opportunity to save about $10,000 every month on recurring expenses with Planergy.

King Ocean Logo

Cristian Maradiaga

King Ocean

Download a free copy of "Indirect Spend Guide", to learn:

  • Where the best opportunities for savings are in indirect spend.
  • How to gain visibility and control of your indirect spend.
  • How to report and analyze indirect spend to identify savings opportunities.
  • How strategic sourcing, cost management, and cost avoidance strategies can be applied to indirect spend.

Budgeting In UK Schools: MAT, Academy Budgeting Challenges and Best Practices

Budgeting In UK Schools MAT

KEY TAKEAWAYS

  • School finance is complex, and budget monitoring is important to prevent overspending.
  • Even using last year’s data to support the current year for your current budget may lead you astray without close monitoring, as factors change over time.
  • Following best practices and facing challenges head-on can help.

Understanding School Budgets

A school budget is more than just a financial document. It’s a strategic tool that maps out the allocation of resources over a specified period, typically a school year.

With a well-planned budget, schools can anticipate revenues, plan for expenditures, and analyze whether there are enough funds to cover operational needs and educational programs for the upcoming financial year.

For instance, a school may allocate part of its budget to improve its science labs to enhance students’ learning experiences.

This decision would be reflected in the budget, showing how much funding will be directed towards this project.

The Significance of Budget Management in Schools

Budget management is the beating heart of every school administration. It ensures transparency, aids decision-making, and enables schools to allocate resources where needed.

Effective budget planning and management prepares schools for financial uncertainties and helps manage risks.

For example, if a school has a robust financial management system in place, it can better handle unexpected situations by budgeting for these variable expenses.

Sudden maintenance or repair work or the need for additional staffing costs due to long term sick leave are likely realities for schools that need to be factored into the budget.

The School Budgeting Process

The budgeting process in schools works similarly to any business budget. Creating a school budget is a meticulous process that involves several steps:

  1. Setting Objectives

    This foundational stage involves identifying what the school aims to achieve, from enhancing student services to upgrading facilities or investing in professional development for staff.

    These objectives should align with the school’s mission and long-term strategic plan.

    For instance, if a school’s mission is to provide a holistic education, an objective could be to allocate funds toward expanding arts programs or sports facilities.

  2. Estimating Income and Expenditure

    On the income side, this includes predicting revenues from various sources such as government funding (dedicated schools grants, for instance), donations, and fundraising activities.

    On the expenditure side, schools must forecast their expenses, including salaries, maintenance costs, supplies, and capital expenditures.

    This step requires careful consideration of past spending patterns, future projections, and current economic conditions.

    A school might, for example, anticipate an increase in energy costs due to rising prices and factor this into its expenditure forecast.

    If you’re unsure where to start, use the previous year as a benchmark. If this is your first year, look at similar schools in the area as a starting ground.

  3. Creating the Budget

    This document serves as a financial roadmap for the school year ahead, outlining how much will be spent in each category and where the funds will come from.

    This step requires collaboration and consensus-building among stakeholders, including school administrators, headteachers, and the local authority. It may also involve difficult decisions about where to allocate resources and what priorities to focus on.

  4. Implementing and Monitoring the Budget

    This involves distributing funds as outlined in the budget and regularly monitoring expenditures to ensure they align with the budget.

    For example, if a school has allocated a certain amount for classroom supplies, the purchasing department must ensure they stay within this limit when ordering supplies to prevent overspending.

  5. Review and Adjust

    At the end of the budget period, it’s time to review it and make adjustments for the next year. Carry out budget analysis reporting, investigate budget variances, and learn lessons to improve budget reporting and forecasting going forward.

    This review process involves comparing actual income and expenditures with the estimates and analyzing discrepancies.

    For example, if a school underestimated its maintenance costs, it would need to adjust these figures in the next budget.

    This continuous cycle of review and adjustment allows schools to improve their budgeting processes over time based on real-world experience and evolving needs.

    School budgeting process

How School Budgets are Divided

Schools typically divide their budgets into different categories.

  • Instructional Costs: Investing in Learning

    Instructional costs form the backbone of any school budget. These costs directly impact the quality of education provided to students. They include teacher salaries, textbooks, classroom supplies, and other learning materials.

    For instance, a school focusing on improving academic performance might allocate a significant portion of its budget toward instructional costs.

    This can involve investing in high-quality textbooks, hiring experienced teachers, or introducing new learning tools and technologies to enhance student engagement and learning outcomes.

  • Non-Instructional Costs: Supporting the School Ecosystem

    Non-instructional costs are equally vital for the smooth operation of a school.

    These day-to-day costs cover administrative expenses, maintenance of school buildings and grounds, and support providers like school nurses or counselors.

    Schools need to allocate sufficient funds to these areas to ensure a safe, clean, and supportive environment for students.

    For example, regular maintenance can prevent larger repair costs down the line. At the same time, investment in support services can help address student well-being and mental health, contributing to better academic outcomes.

  • Capital Expenditures: Building for the Future

    Capital expenditures refer to major costs related to infrastructure improvements or technology upgrades. These are often large, one-off expenses that require careful planning and budgeting.

    For example, a school might decide to refurbish its library or invest in a new IT system.

    While these costs can be substantial, they are critical investments in the school’s future, enhancing the learning environment and equipping students with modern, up-to-date facilities and resources.

    How school budgets are divided

A school might allocate 60% of its budget to instructional costs, 30% to non-instructional costs, and the remaining 10% to capital expenditures.

Multi-Academy Trusts (MATs) and Their Unique Budgeting Approach

Multi-Academy Trusts (MATs) manage their budgeting differently. They receive their school funding from the Department for Education (DfE), which might be fully or partially centralised.

These academies are often comprised of both primary schools and secondary schools, and are inspected by Ofsted, just like maintained schools.

Two key concepts in MAT budgeting are GAG pooling and top-slice budget allocation.

  1. GAG Pooling: A Strategy for Equity

    GAG pooling stands for General Annual Grant pooling. This is a strategic financial approach adopted by MATs in the UK to ensure a more equitable distribution of resources among their academies.

    Under this system, MATs pool their government-allocated funding into one central fund instead of directly distributing it to individual academies.

    This pooled fund is then redistributed based on each academy’s specific needs and circumstances within the trust.

    For example, an academy with more students with special educational needs might require additional resources to provide tailored support and services.

    Through GAG pooling, the MAT can allocate more funds to this academy, ensuring all students across the trust have access to the necessary resources.

    This approach moves away from a ‘my school’ mindset to an ‘all children in the MAT’ perspective.

    It allows resources to be directed to areas where they are most needed, promoting equity and ensuring that every student, regardless of which academy they attend, has the opportunity to succeed.

    However, it’s critical for MATs to manage this process transparently and consult with all stakeholders to ensure that the funds are being allocated fairly and effectively.

    Regular reviews and adjustments may also be necessary to respond to changing needs and circumstances within the trust.

    In essence, GAG pooling is about putting the collective needs of students first and using resources strategically to achieve the best possible outcomes for all.

    GAG pooling is becoming the most popular approach for trusts.

  2. Top-Slice Budget Allocation: Covering Central Services

    Top-slice budget allocation is a common practice in MATs that ensures the provision of essential central services.

    The term ‘top slice’ refers to a percentage of the total funding that is taken off the top – or deducted first – before the remaining funds are distributed among the academies within the trust.

    These top-sliced funds are used to cover the costs of central services provided by the MAT.

    These services can vary between trusts but often include areas such as human resources, legal support, financial management, strategic planning, and other overhead costs associated with running the trust.

    For example, if a MAT receives a total grant of £1 million and decides on a 5% top slice, £50,000 would be allocated to cover central services.

    The remaining £950,000 would then be distributed among the academies in the trust, either evenly or based on individual needs.

    This approach ensures that all academies within the trust have access to essential services and expertise, which can lead to cost savings and efficiencies.

    Instead of each academy having to fund these services independently, they can share the costs, allowing more funds to be directed toward teaching and learning.

    Multi academy trusts budgeting models

Though not for profit, school’s must be managed as businesses to ensure continuous smooth operation for students and staff.

Best Practices for Building a MAT School Budget

  • Know Your Schools Needs

    Understanding each academy’s unique needs, challenges, and opportunities within the trust is crucial.

    This includes knowing the demographics of students, specific requirements, and performance metrics. This in-depth knowledge allows for a more tailored and effective budgeting process.

  • Centralise Control of ‘Big-Ticket’ Items

    Large expenses that affect multiple academies within the trust should be managed centrally. This can lead to cost savings through economies of scale and ensure consistency across the trust.

    Examples of big-ticket items might include IT/ICT infrastructure or learning management systems.

    Putting this with your MATs governing body can get you better deals and helps avoid some of the common problems with education procurement, since you’re purchasing with a higher volume.

  • Have a Long-Term Plan

    While annual budgets are important, having a long-term financial plan is crucial.

    This rolling plan should look ahead at least three to five years, allowing the trust to plan for future investments, anticipate changes, and ensure financial sustainability.

  • Implement Robust Financial Monitoring

    Regular monitoring of actual income and expenditure against budget projections is essential.

    This allows for early identification of any issues or discrepancies and enables timely adjustments to be made. Financial reports should be clear, concise, and provided to all relevant stakeholders.

  • Use GAG Pooling and Top Slicing Strategically

    GAG pooling and top slicing are powerful tools for MATs.

    However, they need to be used strategically and transparently. Regular reviews and adjustments may be necessary to ensure funds are being allocated most effectively and fairly.

  • Engage Stakeholders

    Effective budgeting isn’t a solo activity. It requires input from various stakeholders, including the local authority, school leaders, headteachers, and governors.

    Regular communication and consultation can lead to a more informed and accepted budget.

  • Invest in Professional Development

    Investing in the financial skills and knowledge of those involved in budgeting can pay dividends.

    This can help ensure that budgets are realistic, strategic, and aligned with the trust’s educational objectives.

    Stay Informed of Policy Changes

    Government policies and funding arrangements can have significant implications for school budgets. Staying informed of any changes and understanding their impact is crucial.

Best practices for building a mat school budget

Navigating Challenges in School Budgeting

Budgeting in education comes with a unique set of challenges. These obstacles can be significant but can be navigated successfully with strategic planning and effective management.

  • Balancing Staffing Costs

    The largest expenditure for any school is staffing costs. Schools must ensure they have enough teachers to maintain a reasonable student-teacher ratio and provide quality education.

    However, budget constraints can make paying more staff salaries difficult. Increases in staffing costs that are not matched in funding means school budgets are increasingly stretched.

    Schools must balance hiring enough staff and staying within their budget.

    For instance, a school might decide to invest in professional development for existing staff to increase their teaching capacity instead of hiring additional staff.

    Another strategy could be employing part-time or substitute teachers to manage peak times.

  • Dealing with Funding Shortages

    Another major challenge is dealing with funding shortages. Many schools rely heavily on government funding, which may not always be sufficient or reliable.

    Schools need to have strategies in place to handle these situations.

    This can include seeking additional funding sources such as grants, donations, or fundraising activities.

    Schools may also consider cost-saving measures, like energy-efficient upgrades, to reduce utility costs.

  • Handling Unexpected Expenses

    Unexpected expenses are another hurdle in school budgeting. These can range from sudden repair work to unforeseen events like natural disasters or public health emergencies.

    Schools should aim to build a contingency fund into their budget to handle these situations.

    This provides a financial cushion that can help cover unexpected costs without disrupting the school’s operations or dipping into funds allocated for other areas.

The Bottom Line

Effective budget management is key to the successful operation of schools and academies.

By understanding key budgeting concepts and practices, schools can use their resources most efficiently and effectively as possible to support their educational goals.

From setting clear financial objectives to navigating challenges with resilience, school budgeting is a dynamic process that requires continuous learning and adaptation.

What’s your goal today?

1. Use Planergy to manage purchasing and accounts payable

We’ve helped save billions of dollars for our clients through better spend management, process automation in purchasing and finance, and reducing financial risks. To discover how we can help grow your business:

2. Download our “Indirect Spend Guide”

Download a free copy of our guide to better manage and make savings on your indirect spend. You’ll also be subscribed to our email newsletter and notified about new articles or if have something interesting to share.

3. Learn best practices for purchasing, finance, and more

Browse hundreds of articles, containing an amazing number of useful tools, techniques, and best practices. Many readers tell us they would have paid consultants for the advice in these articles.

Related Posts

The post Budgeting In UK Schools: MAT, Academy Budgeting Challenges and Best Practices appeared first on Planergy Software.

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Multi-Academy Trust (MAT): What Is It and How Can Schools Benefit? https://planergy.com/blog/multi-academy-trust/ Mon, 11 Dec 2023 14:21:32 +0000 https://planergy.com/?p=15542 KEY TAKEAWAYS Multi-Academy Trusts (MATs) are a group of state-funded schools that work together under one central board of directors. MATs aim to band multiple schools together to strengthen all of them. Joining a MAT is a complex process that can go wrong if not well planned and managed. What is a Multi-Academy Trust (MAT)?… Read More »Multi-Academy Trust (MAT): What Is It and How Can Schools Benefit?

The post Multi-Academy Trust (MAT): What Is It and How Can Schools Benefit? appeared first on Planergy Software.

]]>

What's Planergy?

Modern Spend Management and Accounts Payable software.

Helping organizations spend smarter and more efficiently by automating purchasing and invoice processing.

We saved more than $1 million on our spend in the first year and just recently identified an opportunity to save about $10,000 every month on recurring expenses with Planergy.

King Ocean Logo

Cristian Maradiaga

King Ocean

Download a free copy of "Indirect Spend Guide", to learn:

  • Where the best opportunities for savings are in indirect spend.
  • How to gain visibility and control of your indirect spend.
  • How to report and analyze indirect spend to identify savings opportunities.
  • How strategic sourcing, cost management, and cost avoidance strategies can be applied to indirect spend.

Multi-Academy Trust (MAT): What Is It and How Can Schools Benefit?

Multi-Academy Trust

KEY TAKEAWAYS

  • Multi-Academy Trusts (MATs) are a group of state-funded schools that work together under one central board of directors.
  • MATs aim to band multiple schools together to strengthen all of them.
  • Joining a MAT is a complex process that can go wrong if not well planned and managed.

What is a Multi-Academy Trust (MAT)?

A MAT is an academy trust that operates more than one state-funded school with direct funding from the Department for Education (DfE).

The group of academy schools operates under a single governing body or central board of directors.

This model is primarily used in the United Kingdom, where state-funded schools can become academies, giving them more autonomy over their operations than traditionally maintained schools.

What is a multi-academy trust

History of MATs

According to the House of Lords Library, the 1997-2010 Labour Government first introduced the concept of academies.

Initially dubbed ‘city academies’ under the Learning and Skills Act 2000, they were officially renamed academies under the Education Act 2002, drawing inspiration from the city technical colleges initiated by the Conservative Government in the 1980s.

The academy policy was significantly expanded under the 2010-2015 Conservative-Liberal Democrat coalition Government, which passed legislation allowing all types of schools to become academies.

This included primary, special schools, and pupil referral units that previously needed eligibility. 

The number of academies surged from 202 in 2010 to 4,722 in 2015, with student enrolment increasing from 192,640 to 2,742,394.

Since 2015, the Conservative Government has continued to promote academies. 

Their March 2016 budget announced plans to convert all state-funded schools in England into academies by 2020.

They aimed for every primary and secondary school to either be an academy or be in the process of becoming one. 

This policy encouraged top-performing schools to form and manage MATs to share their success with other schools.

The 2017 and 2019 Conservative Party manifestos reiterated their commitment to academies, pledging to encourage more organizations to sponsor academies or establish new free schools, a type of academy.

They also vowed to intervene in schools with persistent underperformance.

By the 2020/21 academic year, the number of academies had risen to 9,444, with 4,591,865 pupils attending these academies.

The Parliament published a 2022 whitepaper outlining the plan for all schools to be part of a MAT by 2030.

According to The Guardian reports, the last time this was tried in 2016, ministers were forced to reverse course partly due to pushback from Conservative councils.

The Role of Academy Schools

Academy schools are state-funded but independently run, meaning they have greater freedom over their curriculum, school budgeting, and staffing than regular state schools.

They are also free for pupils to attend. 

They are inspected by Ofsted, like state schools. Pupils attending academy schools take the same assessments and aim for school improvement across the board.

Structure of a Multi-Academy Trust

In a Multi-Academy Trust, several of these academy schools join together under the leadership of a single governing body.

This central governing body has responsibility for strategic decisions across all the schools in the trust, including financial management, staffing, and educational performance.

Purpose of a Multi-Academy Trust

The aim of a MAT is to improve and maintain high educational standards across several schools through shared resources, best practices, and expertise.

The schools within a MAT often share common values and ethos, fostering a collaborative environment to improve educational outcomes for all students within the trust.

Overall, the main objective of a MAT is to provide a structure that allows for collaboration, resource sharing, and mutual support among a group of academies, with the ultimate goal of enhancing educational provision and outcomes for students.

Financial Aspects of a MAT

MATs are not-for-profit organizations, meaning any surplus funds must be reinvested into the trust’s schools.

They also have charitable status, which provides certain financial benefits such as exemptions from some forms of tax.

Rather than being controlled by the local authority, they receive funding from the government, in the form of a General Annual Grant (GAG).

Each unit within the family of schools can pool all or part of their GAG together to benefit all the individual schools in the entire trust.

They can also pool skills and knowledge to better benefit the entire trust. A good example of this is when it comes to addressing common problems in education procurement and sharing resources.

MATs will usually centralize specific business functions, like finance, to improve efficiency and reduce costs across the group of schools.

Single Academy Trust vs. Multi-Academy Trust

It’s important to note that while all academies are part of an academy trust, not all academies are part of a multi-academy trust. Some operate as a standalone academy under a single academy trust.

A Single Academy Trust operates only one school, giving it autonomy over its operations, including curriculum, budgeting, and staffing.

On the other hand, a Multi-Academy Trust involves several academy schools operating under a single governing body.

This structure allows for collaboration, resource sharing, and mutual support among the schools in the trust to improve educational outcomes for all students.

Single-academy trust vs multi-academy trust

Whether a single or multi-academy MAT, proper allocation of resources is key to success.

Top 6 Performing Large Multi-Academy Trusts in the UK

The UK is home to numerous high-performing MATs, each with unique strengths.

These trusts stand out due to their consistently high performance, innovative teaching methods, robust governance, and commitment to continuous improvement and digital transformation.

The Progress 8 score is a key performance metric in the UK education system. It measures students’ progress from the end of primary school to the end of secondary school, compared to other students nationally with similar prior academic achievement.

According to recent data from Schools Week based on performance data reported by the government, these are the top MATs in the UK that have 10 schools or more. They all surpass the national average for Progress 8 performance of -0.03.

This achievement is all the more notable because most larger MATs include sponsored academies. These academies would have had ‘inadequate’ performance before joining the MAT.

Top 6 multi-academy trusts in the UK

  1. Harris Federation

    Established in 1990, the Harris Federation is one of the most successful MATs in the UK.

    It manages a network of academies in and around London, with a strong record of transforming underperforming schools.

    The trust has a reputation for high academic standards, strong discipline, and an emphasis on student character development.

    Harris Federation had the highest progress 8 results among larger MATs with 0.39.

  2. United Learning Trust

    United Learning Trust operates a mix of state and independent schools across England. Known for its “Best in Everyone” ethos, United Learning Trust focuses on providing a well-rounded education that helps every student reach their full potential.

    They emphasize character education, enriching learning opportunities, and strong partnerships between schools within the trust.

    United Learning Trust had the second highest progress 8 results among larger MATs with 0.35.

    This is all the more impressive as the trust includes 42 academies included in the evaluation.

  3. Star Academies

    Star Academies is a renowned multi-academy trust known for its commitment to educational excellence in the UK.

    This commitment is demonstrated by the impressive scores achieved on the Progress 8 measure by schools within the trust.

    Star Academies had the third highest progress 8 results among larger MATs with 0.33.

  4. Delta Academies Trust

    The Delta Academies Trust is a multi-academy trust that operates a network of schools to improve educational outcomes and change lives for children.

    The trust’s residential center, Dallowgill, provides an environment for students to thrive as individuals.

    Established as an exempt charity, its values are drawn from the public sector, and its directors are appointed voluntarily.

    The Department for Education regulates the trust and operates 46 schools, making it a significant educational provider in North England.

    Delta Academies Trust had the fourth highest progress 8 results among larger MATs with 0.30.

  5. Ark Schools

    Ark Schools is an international charity that runs a network of academies in the UK. The trust is recognized for its commitment to providing high-quality education in disadvantaged communities.

    Ark Schools follows a knowledge-rich curriculum and provides robust training and development opportunities for staff.

    Ark Schools had the fifth highest progress 8 results among larger MATs with 0.25.

  6. Northern Education Trust

    Northern Education Trust is a multi-academy trust in North England. It was established in 2012 and has grown to become one of the North’s largest MATs.

    The trust operates 22 academies; 10 primary academies and 12 secondary.

    Northern Education Trust had the fifth highest progress 8 results among larger MATs with 0.09.

Characteristics of an Excellent Multi-Academy Trust

An outstanding MAT typically features strong leadership, effective governance, and a dynamic curriculum.

The governance structure should be transparent and accountable, promoting the best interests of all schools within the trust.

Leadership is crucial in setting strategic direction, fostering a positive culture, and driving academic excellence.

Additionally, the curriculum should be broad, balanced, and flexible to cater to diverse learning needs.

  • Strong Leadership

    Exceptional leadership is a cornerstone of any successful Multi-Academy Trust.

    The leaders set the strategic direction for all schools within the trust and are responsible for fostering a positive culture that encourages collaboration, innovation, and continuous improvement.

    They play a crucial role in driving academic excellence, ensuring that the trust’s vision and values are embedded in every aspect of the school’s operations.

  • Effective Governance

    Effective governance is another key characteristic of an excellent MAT. The governance structure should be transparent, accountable, and focused on promoting the best interests of all schools within the trust.

    The governing body should include individuals with diverse skills and experiences who can provide robust oversight, challenge the status quo when necessary, and make informed decisions that drive the trust’s strategic objectives.

  • Dynamic Curriculum

    A dynamic and adaptable curriculum is essential in a top-tier MAT. The curriculum should be broad and balanced, offering a wide range of subjects and learning experiences to cater to students’ diverse learning needs and interests.

    It should also be flexible enough to allow for local adaptations, ensuring that each school within the trust can tailor their curriculum to reflect its unique context and community.

  • Collaborative Culture

    A collaborative culture is a defining feature of a high-performing MAT. This involves fostering a spirit of cooperation and mutual support among all schools within the trust.

    Schools should be encouraged to share resources, expertise, and best practices, and work together to tackle common challenges and achieve shared goals. Cross-functional collaboration can benefit everyone.

    This collaborative approach can improve educational outcomes, greater efficiency, and a stronger sense of community across the trust.

  • Commitment to Continuous Improvement

    An excellent MAT is committed to continuous improvement. This involves regularly monitoring and evaluating the trust’s performance, seeking stakeholder feedback, and using this information to inform strategic planning and decision-making.

    This may involve tracking and reviewing academic performance, mental health of staff and pupils, etc. This will ensure the best educational and well-being outcomes.

    It will also likely include tracking common business KPIs like procurement KPIs and accounts payable KPIs. This will ensure the best business efficiency and value for money is realised by the trust.

    A commitment to continuous improvement ensures that the trust always strives to enhance its educational provision and deliver the best possible outcomes for all students.

Characteristics of an excellent multi-academy trust

Potential Drawbacks of Multi-Academy Trusts

While MATs offer many benefits, they have potential drawbacks. These include the risk of losing individual school identity, potential inconsistencies in educational standards across the trust, and challenges in managing diverse school needs.

Effective leadership with a strong chief executive, clear communication, and regular monitoring can help mitigate these issues.

  • Loss of Individual School Identity

    As schools join a MAT, they often adopt the trust’s common ethos and strategic direction.

    While this can foster unity and collaboration, it may dilute each school’s unique culture and traditions.

    This can concern parents, students, and staff who value their school’s existing identity.

  • Inconsistencies in Educational Standards

    While one of the aims of MATs is to improve and maintain high educational standards across all schools, achieving this consistently can be challenging.

    There might be variations in performance between different schools within the trust due to various factors, including leadership quality, resources, and community context.

    This could lead to disparities in student outcomes and experiences across the trust.

  • Managing Diverse School Needs

    Managing the diverse needs of multiple schools can be a complex task. Each school within a MAT has its unique challenges, opportunities, and community context.

    Balancing these diverse needs while maintaining a unified strategic direction can be a delicate juggling act.

  • Centralization of Power

    The power within a MAT is often centralized in the hands of a few key individuals or the central board of trustees.

    This can lead to decisions being made that are distant from the unique contexts of individual schools. If not managed carefully, this can result in decisions that do not fully consider the specific needs of each school.

  • Financial Risks

    While pooling resources can lead to efficiencies, it also presents financial risks. If one school in the trust faces financial difficulties, it could impact the entire trust.

    Additionally, as MATs grow in size, they may face increased scrutiny and regulatory requirements, adding to their operational complexity and cost.

    Potential drawbacks of multi-academy trusts

Many headteachers have raised issues with joining a MAT, according to The Guardian.

Alex Smythe is headteacher of Newcroft primary school in Leicestershire who says, “We were already supporting another school quite significantly and, to an extent, we were forced to form a multi-academy trust (MAT) because that school was close to being closed or taken over by others.” She likened it to doing a favor for the DfE.

Rob Campbell, principal of Impington Village College, said, “Moving into a MAT is even more complex; are you the lead school? How are you working together? What’s your scheme of delegation?”

Rob continues, “Becoming part of an MAT is like marriage without the possibility of divorce – and let’s face it, most of us would think very carefully if there was no divorce. Talk to as many people who have gone through it as you can. You really need to know and understand the process, and if you don’t yet, find a way to make damn well sure that you do.”

That’s why due diligence is so important.

Is the Multi-Academy Trust Model the Future of UK Education?

The MAT model has become increasingly prevalent in the UK education sector in recent years.

Its emphasis on collaborative working, resource sharing, and mutual support aligns well with the evolving needs of today’s learners.

However, like any educational model, its success largely depends on effective implementation and continuous improvement.

Examples of successful MATs show that with robust governance, strong leadership, and a student-centred approach, the MAT model can contribute significantly to UK education’s future.

What’s your goal today?

1. Use Planergy to manage purchasing and accounts payable

We’ve helped save billions of dollars for our clients through better spend management, process automation in purchasing and finance, and reducing financial risks. To discover how we can help grow your business:

2. Download our “Indirect Spend Guide”

Download a free copy of our guide to better manage and make savings on your indirect spend. You’ll also be subscribed to our email newsletter and notified about new articles or if have something interesting to share.

3. Learn best practices for purchasing, finance, and more

Browse hundreds of articles, containing an amazing number of useful tools, techniques, and best practices. Many readers tell us they would have paid consultants for the advice in these articles.

Related Posts

The post Multi-Academy Trust (MAT): What Is It and How Can Schools Benefit? appeared first on Planergy Software.

]]>
Days Inventory Outstanding: What Is It and How to Calculate It https://planergy.com/blog/days-inventory-outstanding/ Thu, 26 Oct 2023 12:38:43 +0000 https://planergy.com/?p=15453 IN THIS ARTICLE What Is Days Inventory Outstanding? What Is the Formula for Calculating Days Inventory Outstanding? Should Days Inventory Outstanding Be High or Low? Benefits of Days Inventory Outstanding Disadvantages of DIO What Effect Does Days Inventory Outstanding Have on Profitability? How Do You Use Days Inventory Outstanding To Calculate Cash Flow Conversion? How… Read More »Days Inventory Outstanding: What Is It and How to Calculate It

The post Days Inventory Outstanding: What Is It and How to Calculate It appeared first on Planergy Software.

]]>

What's Planergy?

Modern Spend Management and Accounts Payable software.

Helping organizations spend smarter and more efficiently by automating purchasing and invoice processing.

We saved more than $1 million on our spend in the first year and just recently identified an opportunity to save about $10,000 every month on recurring expenses with Planergy.

King Ocean Logo

Cristian Maradiaga

King Ocean

Download a free copy of "Indirect Spend Guide", to learn:

  • Where the best opportunities for savings are in indirect spend.
  • How to gain visibility and control of your indirect spend.
  • How to report and analyze indirect spend to identify savings opportunities.
  • How strategic sourcing, cost management, and cost avoidance strategies can be applied to indirect spend.

Days Inventory Outstanding: What Is It and How to Calculate It

Days Inventory Outstanding

If you currently manage inventory for your business, you know how important it is to order the correct amount of raw materials, turn the materials into finished goods and sell those products to your customers.

But do you know how quickly your company is doing that?

It’s easy to find out by calculating the Days Inventory Outstanding metric, a financial ratio designed to help both management and investors have a better understanding of how quickly inventory can be turned into sales.

What Is Days Inventory Outstanding?

Days Inventory Outstanding (DIO) is an easily calculated metric used to determine the average number of days it takes a company to convert its inventory into sales.

Also known as Days in Inventory or Days Sales of Inventory, the Days Inventory Outstanding ratio is helpful when evaluating the operating efficiency of a company, and is beneficial to management and investors alike.

What Is the Formula for Calculating Days Inventory Outstanding?

The days inventory outstanding formula is:

Average Inventory/Cost of Goods Sold x Number of Days = Days Inventory Outstanding

The days inventory outstanding formula

To begin calculating DIO, you’ll first need to calculate the average value of your inventory for a specific period of time.

For example, if you’re calculating DIO at the end of the year, you’ll take your beginning inventory total, and your ending inventory total, and divide that by 2 to get your average inventory.

This is the formula to calculate your average inventory for the period:

(Opening Inventory + Closing Inventory) / 2 = Average Inventory

Average inventory for the period formula

You can also calculate DIO quarterly if you prefer. Let’s say your inventory total as of January 1, 2023, is $115,000 and your ending inventory total for March 31 is $145,000, the total inventory would be $260,000.

This number is then divided by two, making your average inventory for the first quarter $130,000.

Next, you’ll obtain your cost of sales or cost of goods sold (COGS)from your income statement for the same period. If you’re calculating the cost of goods sold manually, you would use the following formula:

Opening Inventory + Purchases – Closing Inventory = Cost of Goods Sold

The cost of goods sold manually formula

For this example, we’ll say that the COGS total for the first quarter is $495,000.

Finally, you’ll need to calculate the number of days in which you’re calculating DIO. For the first quarter, the number of days would be 90. 

If you were calculating DIO for the year, the total number of days would be 365.

Now that you have all of the necessary totals, you’re ready to calculate the DIO.

$130,000 / $495,000 x 90 = 23.63 days

The result shows that for the first quarter of 2023, your business is able to clear existing inventory every twenty-four days. 

For planning purposes, the result means that you’ll likely sell out and restock inventory monthly.

Should Days Inventory Outstanding Be High or Low?

The general consensus when it comes to days inventory outstanding is that a low DIO is better.

That’s because the faster a company is able to transform materials and suppliers into a finished product ready for sale, the more efficiently they’re operating, and the quicker cash flow can be generated.

Take a look at the chart below to see what both lower and higher days inventory outstanding means for your business.

Low Days Inventory OutstandingHigh Days Inventory Outstanding
A lower DIO indicates ordering is efficient within the companyA higher DIO can mean that inventory isn’t being managed properly
A lower DIO indicates that your business is more efficient at selling inventoryA higher DIO can result from poor marketing efforts or a lack of product exposure
A lower DIO means that inventory is converted into revenue quicklyA higher DIO may indicate that pricing is too high when compared with comparable products
A lower DIO usually means that you’ll need to watch inventory supply closely, particularly if sales increase to avoid out-of-stock issuesA higher DIO can mean that the product you’re selling has become obsolete or the market has become saturated with similar products

What days payable outstanding tells you

The days inventory outstanding metric can be valuable to businesses that manage inventory, but the results shouldn’t be used in a bubble.

Instead, the DIO should be paired with similar ratios such as the inventory turnover ratio or the cash conversion cycle to get a clearer picture of inventory movement and cash flow.

Only compare your days inventory outstanding results with similar companies and not across multiple industries.

For example, if the industry average is 50 days and your company’s DIO is 40, you’re performing better than your competitors.

Likewise, if the standard DIO is 50 and your company’s DIO is 65, then your DIO would be considered high.

If it is high, investigating why it’s higher than your competitors and correcting those issues can make your business more competitive.

Benefits of Days Inventory Outstanding

Managing inventory properly is one of the keys to business success. Proper management should include knowing how long your business takes to convert inventory into completed goods.

DIO provides that information to business owners, CFOs, and managers, but also plays a key role for investors looking to see how quickly a business converts raw products into a saleable item, since revenue is dependent on having a finished product to sell.

Tracking this information along with landed cost will give you a much better understanding of how long it takes and how much it costs to prepare your goods for sale.

Other benefits of calculating your DIO include:

  • Better Cash Flow Management

    Knowing your DIO is important for cash flow management purposes.

    For instance, if it currently takes your business 30 days to convert inventory into a completed product for sale, you can better plan future cash flow by knowing when those products will be available for sale.

  • Ability to Identify Inefficiencies

    Knowing your DIO helps to identify inefficiencies in your manufacturing process, so improvements can be made.

  • More Informed Product Pricing

    Knowing exactly how long it takes to produce a finished product ready to sell is an important component of your pricing strategy.

    For example, you may want to price a product that takes longer to manufacture higher than that of a similar product that can be completed in less time.

  • Better Overall Inventory Management

    Knowing your DIO can help you manage your inventory flow more efficiently.

    Knowing how long it takes to convert inventory into a finished product can help you better plan materials and supplies orders, eliminating both overstocking of inventory from ordering too frequently, or understocking, which can result in delayed manufacturing and backorders.

Benefits of tracking days inventory outstanding

Disadvantages of DIO

There are tremendous benefits derived from calculating your company’s DIO, but there are some disadvantages as well, starting with an inaccurate average inventory total, which is the result of inconsistent inventory purchases.

For example, if your business is negotiating a large order from one of your best customers, you’ll likely order excess inventory to complete the order.

However, that inventory does not accurately reflect your average inventory for that time period, since you’ll likely not order the same amount of inventory regularly.

Another disadvantage is that while the DIO calculation can provide you with an idea of how efficiently your business is producing inventory for sale.

If you have a high DIO, it remains up to you to discover any bottlenecks that are causing your number to be higher than it should be.

What Effect Does Days Inventory Outstanding Have on Profitability?

Profitability is directly related to the ability to sell products, so it stands to reason that your DIO will directly impact profitability and your company’s cash balance.

DIO won’t give a direct understanding of profitability in the same way profitability ratios will, but it is useful none the less.

A lower days inventory outstanding number is an indication that a business is able to prepare its current inventory for sale quickly. The faster that process is, the faster revenue will be collected.

However, if your DIO indicates that a business only turns over inventory twice a year, profitability will be directly affected, with fewer sales and less revenue.

How Do You Use Days Inventory Outstanding To Calculate Cash Flow Conversion?

Because Days Inventory Outstanding measures the number of days it takes to convert inventory into sales, it is one of the three metrics used when calculating the Cash Conversion Cycle (CCC).

Two other activity ratios: Days Payable Outstanding (DPO), and Days Sales Outstanding (DSO) are also used in the calculation.

Using these three metrics together, the Cash Conversion Cycle measures the time it takes to purchase supplies and materials, turn them into a saleable product, sell the product to your customers, and collect payment for the items that are sold.

The formula to calculate CCC is:

DIO+ DSO + DPO = CCC

formula to calculate cash conversion cycle

CCC results can be used to compare current performance against other similar companies. Potential investors and creditors also use Cash Conversion Cycle results to analyze the efficiency of business operations.

How To Improve Days Inventory Outstanding

As stated earlier, in most cases, a lower DIO is more favorable for a business than a higher one.

If after calculating your days inventory outstanding, you see a need for improvement, there are ways to improve your days inventory outstanding results.

  • Use Technology

    Keeping track of inventory manually is time-consuming and ripe for errors.

    Instead, opt to use an automated inventory management system that can streamline the entire inventory process, including the ability to track inventory levels, identify both best-selling and slow-moving products, and manage inventory reorders more efficiently.

  • Manage Your Supply Chain

    If you have to choose between a supplier that ships materials immediately and one that takes weeks to ship, which one would you choose?

    Delays in shipping mean delays in finishing your products, which in the end means delays in offering those products for sale.

    The longer you wait for an order, the longer it will take to get that inventory ready for sale. You can also switch to just-in-time inventory, which is where you order only when needed.

  • Forecast More Accurately

    The ability to accurately forecast inventory movement reduces or eliminates the chances of excess inventory.

    Using the right technology also allows you to review historical inventory movement, inventory value, forecast customer demand, review market trends and replace inventory timely.

    Optimizing inventory also reduces the possibility of running out of stock, which results in lost orders.

  • Get Rid of Slow-Moving and Obsolete Inventory

    Pausing ordering on slow-moving stock helps to prevent an overstock issue.

    And if you’re stuck with numerous products that aren’t moving, consider implementing sales strategies like discounts and two-for-one sales to get the product out of the door.

    How to improve days inventory outstanding

Days Inventory Outstanding Is a Key Piece in Managing Inventory

To be successful, it’s necessary for business owners to manage their inventory properly. 

That starts with calculating your days inventory outstanding.

But for a more accurate and complete picture of your business, DIO should always be coupled with other accounting ratios such as the Inventory Turnover Ratio and the Cash Conversion Cycle.

But the best way to manage your inventory is to modernize your company’s inventory management process.

If you’re still using an inventory management system that utilizes manual processes like Microsoft Excel, consider moving to an automated inventory system, which makes it much easier to see exactly how your inventory is performing.

What’s your goal today?

1. Use Planergy to manage purchasing and accounts payable

We’ve helped save billions of dollars for our clients through better spend management, process automation in purchasing and finance, and reducing financial risks. To discover how we can help grow your business:

2. Download our “Indirect Spend Guide”

Download a free copy of our guide to better manage and make savings on your indirect spend. You’ll also be subscribed to our email newsletter and notified about new articles or if have something interesting to share.

3. Learn best practices for purchasing, finance, and more

Browse hundreds of articles, containing an amazing number of useful tools, techniques, and best practices. Many readers tell us they would have paid consultants for the advice in these articles.

Related Posts

The post Days Inventory Outstanding: What Is It and How to Calculate It appeared first on Planergy Software.

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How To Establish & Build Business Credit https://planergy.com/blog/how-to-build-establish-business-credit/ Tue, 17 Oct 2023 10:52:09 +0000 https://planergy.com/?p=15411 KEY TAKEAWAYS Businesses don’t automatically receive a credit rating upon creation. An established business in good standing with the business credit reporting agencies will get better terms. Sole proprietors cannot establish a business credit file. Building and maintaining a strong business credit profile can be a game-changer for your company.  From securing better loan terms… Read More »How To Establish & Build Business Credit

The post How To Establish & Build Business Credit appeared first on Planergy Software.

]]>

What's Planergy?

Modern Spend Management and Accounts Payable software.

Helping organizations spend smarter and more efficiently by automating purchasing and invoice processing.

We saved more than $1 million on our spend in the first year and just recently identified an opportunity to save about $10,000 every month on recurring expenses with Planergy.

King Ocean Logo

Cristian Maradiaga

King Ocean

Download a free copy of "Indirect Spend Guide", to learn:

  • Where the best opportunities for savings are in indirect spend.
  • How to gain visibility and control of your indirect spend.
  • How to report and analyze indirect spend to identify savings opportunities.
  • How strategic sourcing, cost management, and cost avoidance strategies can be applied to indirect spend.

How To Establish & Build Business Credit

How To Establish and Build Business Credit

KEY TAKEAWAYS

  • Businesses don’t automatically receive a credit rating upon creation.
  • An established business in good standing with the business credit reporting agencies will get better terms.
  • Sole proprietors cannot establish a business credit file.

Building and maintaining a strong business credit profile can be a game-changer for your company. 

From securing better loan terms to winning more clients, the benefits of good business credit are hard to ignore.

This comprehensive guide will dive into business credit, its importance, and how to establish and build your credit effectively.

Understanding Business Credit

Business credit, also known as commercial credit, measures a company’s ability to meet its financial obligations.

Similar to personal credit, business credit is tracked by credit bureaus and is reflected in a credit score. 

This score indicates the creditworthiness of a business and helps lenders, vendors, and other stakeholders make informed decisions when working with the company.

Deciphering Business Credit Scores

A business credit score is a numerical representation of a company’s creditworthiness. 

It’s typically calculated based on factors such as credit history, outstanding debts, payment history, and public records like bankruptcies, liens, or judgments.

The most well-known business credit scoring system is the Dun & Bradstreet PAYDEX score, which ranges from 1 to 100, with higher scores indicating better creditworthiness.

Other major business credit bureaus include Experian and Equifax, each with its own scoring system. The FICO Small Business Scoring Service (FICO SBSS) ranges from 0 to 300, for instance.

Personal vs. Business Credit Scores

While both business and personal credit reporting share the common goal of providing a measure of creditworthiness, there are a number of key differences between the two.

  • Credit Reporting Agencies

    Personal credit reports are generated by three major credit bureaus: Experian, Equifax, and TransUnion. These agencies track and record your personal credit history, which includes credit cards, mortgages, student loans, and other personal debts.

    On the other hand, business credit reports are typically generated by different agencies, the most prominent being Dun & Bradstreet, Experian Business, and Equifax Business.

    These bureaus track credit information related to businesses, such as business credit cards, trade credit from suppliers, and business loans.

  • Information Included in the Reports

    A personal credit report includes personal information like your name, Social Security number, addresses, and employment history. It also contains detailed information about your credit accounts, payment history, and any public records such as bankruptcies or tax liens.

    Business credit reports, however, focus on the business’s details. They include the business name, address, industry, and information about the company’s credit obligations and payment history. They may also contain information about the business’s public records, such as judgments, liens, or bankruptcies.

  • Scoring Models

    Personal credit scores typically range from 300 to 850, based on models like FICO or VantageScore. These scores take into account factors such as your payment history, amounts owed, length of credit history, types of credit used, and new credit.

    Business credit scores, however, can vary more widely depending on the scoring model used by the credit bureau. These scores consider factors such as the business’s payment performance, credit utilization, length of credit history, and the company’s size and industry risk.

  • Privacy

    Personal credit reports are protected by the Fair Credit Reporting Act (FCRA), which limits who can access your personal credit information and for what purposes. You’re also entitled to one free personal credit report from each of the three major bureaus every year.

    Business credit reports, however, do not have these same protections. Credit bureaus can sell business credit information to anyone willing to pay for it, and there’s no legal right to a free annual business credit report. This makes it even more crucial for businesses to monitor their business credit reports and ensure the information is accurate and up-to-date.

Personal vs business credit scores

Starting With an LLC

When you first form a limited liability company (LLC), it doesn’t automatically have a business credit score.

You’ll need to take steps to establish credit for your LLC, starting with setting up a separate business entity, opening a business bank account, and getting an Employer Identification Number (EIN) from the IRS.

Once these initial steps are taken, you can build your business credit profile by obtaining credit from vendors, securing loans, and making timely payments.

Note: A sole proprietorship cannot establish business credit, as it is not considered a separate legal entity from the person who operates it.

While entrepreneurs who are just getting started can benefit from a sole proprietorship because of how easy it is to start, it makes sense to form an LLC or corporation as a business grows.

Startups seeking venture capital or other forms of funding to expand their business must be an LLC or a corporation.

The Importance of Building Business Credit

Establishing and maintaining strong business credit offers several advantages. 

A good business credit score can help you secure better loan terms and lower interest rates, reducing borrowing costs.

This gives you additional flexibility and options for cash flow management, liquidity management, and for managing your working capital.

Lenders are more likely to approve larger loans and lines of credit if your business has strong credit. Suppliers often offer more favorable payment terms and discounts to businesses with good credit.

A solid credit profile can also make your business more attractive to potential investors and clients, who may view it as a sign of financial stability and competence.

Steps to Establish and Build Business Credit

Steps to establish and build business credit

  1. Register Your Business and Obtain an EIN

    For a business to establish its own credit, it must first be recognized as a separate entity from the owner. This involves registering your business with your state’s Secretary of State office. The type of registration (e.g., LLC, Corporation) will depend on your business structure.

    Next, you’ll need to get an EIN from the IRS. An EIN is like a Social Security number for your business and is used by the IRS to track your business’s tax obligations. It’s also required by most banks to open a business bank account, or run payroll.

    For example, if Joe wants to start his coffee shop as an LLC, he would first register his business with his state’s Secretary of State office.

    After receiving confirmation of his LLC status, he would apply for an EIN through the IRS website. Many companies that put together business filing packages for you charge for obtaining an EIN, but you can do it for free. Once you have it, don’t lose it! You’ll have to call the IRS to obtain it again.

  2. Open a Business Bank Account

    After your business is registered and has an EIN, the next step is to open a business bank account. This helps reinforce the separation between your personal finances and your business operations. It makes managing business expenses, tracking cash flow, and preparing for taxes easier.

    Let’s say, Joe, from our previous example, opens a business checking account under his coffee shop’s name and EIN. He uses this account to pay for all business-related expenses, such as buying coffee beans and paying employees. By doing this, he’s establishing a financial history for his business.

  3. Establish a Business Address and Phone Number

    Establishing a separate business address and phone number further reinforces your business as a distinct entity. It also provides credit bureaus with consistent information about your business. You can use a physical address or a registered agent service and set up a landline or virtual phone number for your business.

    For instance, Joe might rent a small office space for his coffee shop and list that address for all business registrations and applications. He might also set up a separate business phone line or use a VoIP service for business calls.

  4. Register with Business Credit Bureaus

    Registering with the major business credit bureaus—Dun & Bradstreet, Experian Business, and Equifax Business—helps ensure your business’s credit activity is accurately tracked. For example, Dun & Bradstreet issues a D-U-N-S number, a unique nine-digit identifier for businesses.

    Joe, wanting to build good business credit for his coffee shop, would request a D-U-N-S number for his business. Later, when he starts working with suppliers and lenders who report to these credit bureaus, his business’s credit activity will be associated with this number.

  5. Obtain Business Credit

    To start building your business credit history, obtain credit from suppliers, vendors, or lenders that report to the business credit bureaus. This could be a business credit card, a trade account with a supplier, or a small business loan.

    For instance, Joe might apply for a business credit card and use it for regular business expenses. Or he might set up a trade credit account with his coffee bean supplier, where he receives the beans now but pays for them 30 days later (net-30 terms). Both activities will help establish his business credit if reported to the credit bureaus.

  6. Pay Your Bills on Time

    There are many reasons to pay your bills on time, including to maintain strong vendor relationships. Maintaining a strong credit rating is another reason for this.

    Just like with personal credit, your payment history plays a significant role in your business credit score. Consistently paying your bills on time shows lenders and creditors that your business is reliable and financially stable.

    If Joe consistently pays his business credit card bill and trade credit account on time, this positive payment history will be reflected in his business credit score, making it easier for him to secure additional credit or loans in the future.

  7. Monitor Your Business Credit Report

    Regularly reviewing your business credit report allows you to catch any errors or discrepancies that could negatively impact your business credit score. It also helps you understand what actions improve your score and which might hurt it.

    For example, Joe might notice that one of his suppliers isn’t reporting his on-time payments to the credit bureaus. After noticing this, he might choose to switch to a supplier who does report payments, thus further building his business credit.

    As with personal credit, building credit for your business takes time. The better you score, the better your financing options become.

Fast Track to Business Credit for an LLC

To quickly establish business credit for your LLC, consider the following strategies:

  • Use a Business Credit Card

    Business credit cards are a powerful tool for building business credit quickly. They allow businesses to make purchases and pay them off over time, demonstrating reliability and creditworthiness to credit bureaus.

    For example, a business owner could use a business credit card to pay for routine expenses such as office supplies or utility bills. By paying off the balance each month, the business establishes a history of reliable payments, which can help improve its business credit score.

    Choosing a business credit card that reports to the major business credit bureaus is important. Also, manage the card responsibly – keep the balance low and make payments on time.

  • Secure a Small Business Loan or Line of Credit

    Securing a small business loan is another effective way to establish business credit. When a business takes out a loan and makes regular payments, it demonstrates to lenders that it can handle debt responsibly.

    For instance, a business owner might take out a small business loan to purchase new equipment. If they make their loan payments on time, this positive payment history will be reported to the credit bureaus, helping to build the business’s credit profile.

    Small business loans can be obtained from various sources, including banks, credit unions, and online lenders. Some businesses might also qualify for government-backed loans from the Small Business Administration (SBA), which often have lower interest rates and flexible terms.

  • Leverage Your Personal Credit

    In some cases, business owners with strong personal credit can leverage it to get business credit. This can be particularly useful for new businesses that haven’t had the chance to establish their own credit yet.

    For example, some lenders offer personal guarantee business loans, where the business owner’s personal credit score is used to guarantee the loan. If the business fails to repay the loan, the lender can seek repayment from the business owner personally.

    While this method can help businesses establish credit more quickly, it also carries risks. If the business fails to repay the loan, the business owner’s personal credit could be damaged. Therefore, this strategy should be used carefully and as a last resort.

Fast track to business credit for an LLC

Building Small Business Credit Takes Time and Effort

Building business credit takes time and effort, but the benefits are well worth the investment.

By following these steps and remaining diligent about managing your business finances, you’ll be well on your way to establishing and improving your company’s credit profile.

What’s your goal today?

1. Use Planergy to manage purchasing and accounts payable

We’ve helped save billions of dollars for our clients through better spend management, process automation in purchasing and finance, and reducing financial risks. To discover how we can help grow your business:

2. Download our “Indirect Spend Guide”

Download a free copy of our guide to better manage and make savings on your indirect spend. You’ll also be subscribed to our email newsletter and notified about new articles or if have something interesting to share.

3. Learn best practices for purchasing, finance, and more

Browse hundreds of articles, containing an amazing number of useful tools, techniques, and best practices. Many readers tell us they would have paid consultants for the advice in these articles.

Related Posts

The post How To Establish & Build Business Credit appeared first on Planergy Software.

]]>
GAG Pooling: What Is It, Challenges, and Benefits https://planergy.com/blog/gag-pooling/ Fri, 13 Oct 2023 11:12:47 +0000 https://planergy.com/?p=15393 KEY TAKEAWAYS GAG pooling allows multiple schools within a multi-academy trust to group the GAG funding from each school into one central budget. While it offers numerous benefits, there are several challenges to consider. Policies and agreements are necessary to ensure all school budgets are adequate and supported. GAG pooling, short for General Annual Grant… Read More »GAG Pooling: What Is It, Challenges, and Benefits

The post GAG Pooling: What Is It, Challenges, and Benefits appeared first on Planergy Software.

]]>

What's Planergy?

Modern Spend Management and Accounts Payable software.

Helping organizations spend smarter and more efficiently by automating purchasing and invoice processing.

We saved more than $1 million on our spend in the first year and just recently identified an opportunity to save about $10,000 every month on recurring expenses with Planergy.

King Ocean Logo

Cristian Maradiaga

King Ocean

Download a free copy of "Indirect Spend Guide", to learn:

  • Where the best opportunities for savings are in indirect spend.
  • How to gain visibility and control of your indirect spend.
  • How to report and analyze indirect spend to identify savings opportunities.
  • How strategic sourcing, cost management, and cost avoidance strategies can be applied to indirect spend.

GAG Pooling: What Is It, Challenges, and Benefits

GAG Pooling: What Is It Challenges and Benefits

KEY TAKEAWAYS

  • GAG pooling allows multiple schools within a multi-academy trust to group the GAG funding from each school into one central budget.
  • While it offers numerous benefits, there are several challenges to consider.
  • Policies and agreements are necessary to ensure all school budgets are adequate and supported.

GAG pooling, short for General Annual Grant pooling, is a principle in UK education funding where the funds allocated to each school within a Multi-Academy Trust (MAT) are combined.

Rather than each school managing its budget independently, all the funds are pooled and then distributed based on strategic decisions made by the MAT.

The GAG is a block grant from the Education and Skills Funding Agency (ESFA), calculated based on student numbers and needs. The grant covers running costs like salaries, utilities, and learning resources. As such, it’s a crucial lifeline that enables schools to operate effectively and provide quality education.

Not all Trusts limit themselves to pooling only the GAG income. Some also pool other ESFA or Local Authority income streams and self-generated, non-government income.

While the ESFA encourages GAG pooling, they have not provided detailed practical management guidance. There are no strict rules regarding which income streams should or shouldn’t be pooled.

As stated in the Academies Trust Handbook by the ESFA, the only exception is Private Finance Initiative (PFI) funding. According to the academy’s funding agreement, PFI funding should not be pooled.

What is GAG pooling?

GAG pooling is a strategic approach in financial management where the GAG funding of all schools within a MAT is combined into a single, central fund.

It deviates from the traditional model where each school manages its budget independently.

Instead, the MAT leadership redistributes the pooled funds across schools based on strategic priorities and individual school needs. This approach fosters collective responsibility, financial stability, and strategic resource allocation.

Why Use GAG Pooling?

The primary purpose of GAG pooling is to enable more strategic and flexible use of resources across a MAT.

It can enhance purchasing power as larger orders or contracts may attract discounts, allow for flexibility in budget allocation based on specific needs, and even help struggling schools through financial difficulties.

However, implementing GAG pooling comes with its challenges.

  • Individual schools may resist due to fear of losing control over their budgets.
  • New governance structures must be established to oversee and manage pooled resources, potentially adding complexity to the existing system.
  • Managing a larger budget can also be difficult, requiring financial expertise and robust management systems.

Top Slice GAG

Top slicing is a practice where the Trust Central Management retains a portion of each school’s GAG funding for central services.

These services can include HR, IT support, and other shared services that benefit all schools within the trust.

Top slicing aims to reduce operational costs at individual schools by leveraging economies of scale. However, unlike GAG pooling, top slicing doesn’t involve the complete consolidation of budgets.

Top Slice vs. GAG Pooling

While both GAG pooling and top slicing are financial strategies employed by MATs, they differ significantly in how they handle funds.

In top slicing, only a portion of the GAG funding is taken by the Trust, leaving the rest for individual schools to manage. This model allows for some centralisation of resources but maintains a degree of financial autonomy at the school level.

On the other hand, GAG pooling involves fully consolidating all GAG funding into a single pool managed by the MAT. The MAT then allocates funds strategically across schools based on needs and strategic priorities.

This model promotes greater financial flexibility and strategic resource allocation but requires robust governance structures and clear communication to ensure fair and effective distribution of funds.

It’s up to school leaders in the MAT to build and develop the trust board, agreements, policies, etc. in a way that will benefit all members.

Benefits of Gag Pooling

  • Enhanced Purchasing Power

    One of the primary benefits of GAG pooling is increased purchasing power, for better and faster procurement.

    By consolidating funds they can also consolidate and centralize purchasing in certain areas of spend, MATs can negotiate better deals with suppliers and service providers, thus saving costs and maximizing resources.

    For example, a MAT might negotiate a bulk purchase of IT equipment or learning resources across its schools, securing a significant discount that wouldn’t be accessible to individual schools.

  • Flexibility in Budget Allocation

    GAG pooling allows for greater flexibility in budget allocation. Funds can be directed towards schools or projects that need them the most, ensuring resources are used strategically and effectively.

    This flexibility can be particularly beneficial during times of unexpected financial strain, such as the need for sudden infrastructure repairs or investment in new teaching resources.

    When exceptional costs arise during the year individual schools will no longer need to make very difficult decisions to find the needed funds, this can be absorbed by central funding.

  • Supporting Struggling Schools

    GAG pooling provides a safety net for weaker schools facing financial difficulties. Instead of struggling schools trying to navigate financial challenges alone, resources can be allocated from the pooled funds to support them.

    This collective responsibility fosters a supportive environment and ensures all constituent academies within the MAT can thrive.

Benefits of gag pooling

Challenges of GAG Pooling

  • Economic Challenges

    One of the primary economic challenges is the fear of losing financial autonomy. Schools may resist GAG pooling as they worry about losing control over their budgets. Losing autonomy is a key cultural challenge for any school joining a MAT.

    This resistance can be particularly strong in financially healthy schools that might perceive GAG pooling as a risk to their stability.

    Another economic challenge is the potential for financial mismanagement. Handling a large, consolidated budget requires powerful financial systems and expertise.

    Without these, there’s a risk of misallocating funds, which could lead to financial instability within the MAT.

  • Cultural Challenges

    Culturally, GAG pooling represents a significant shift from ‘my school’ to ‘our schools.’ It requires a collective mentality and trust among all stakeholders, which can be challenging to cultivate.

    Individual schools may fear that their unique needs will be overlooked in favor of a one-size-fits-all approach. Headteachers may feel their autonomy being eroded.

  • Systemic Challenges

    Systemically, implementing GAG pooling requires changes to governance structures. New decision-making processes must be established to manage the pooled resources, adding another layer of complexity to the existing system.

    There may also be legal hurdles to overcome, as the current policies may not fully support the concept of GAG pooling.

Challenges of gag pooling

Steps for Effectively Pooling GAG

Steps for effectively pooling gag

  1. Draft a Pooling Policy or Agreement

    The first step is to draft a formal GAG pooling agreement or policy. This document should clearly outline how the pooled funds will be managed and allocated.

    It should cover everything from the decision-making process to the procedures for handling any disputes. The agreement should be transparent, fair, and agreed upon by all schools within the MAT.

  2. Maintain GAG Receipts

    Keeping accurate records of GAG receipts is crucial for transparency and accountability.

    Detailed records of the GAG funding received per school should be maintained, this is usually the responsibility of the Trust. These records can then be audited to ensure all funds are correctly pooled and distributed.

  3. Operate with Budget Centralisation

    Centralising the budget is a key aspect of GAG pooling. This involves consolidating all budgets within the MAT and having a central body – usually the MAT leadership or a designated committee – manage them.

    The central body is responsible for allocating funds strategically across schools, ensuring resources are used effectively and efficiently.

    Individual schools are not required to operate at cost neutral or surplus avoiding the need for budget deficits to be explained to the ESFA at school level as the Trust as a whole is not in deficit.

  4. Monitor Schools

    Regularly monitoring schools within the MAT is necessary to determine their financial needs and ensure funds are being used appropriately. It is also mandatory as part of the governance guidance for MATs.

    This could involve regular financial audits, reviews of spending, and assessments of financial performance. Monitoring helps identify any issues early and allows for timely interventions if needed.

  5. Maintain Centralised Spend

    Maintaining a centralised spend involves managing certain expenditures at the central level rather than at individual schools.

    This could include shared services like IT support or HR, or bulk purchases of resources. Centralising these expenses can lead to cost savings through economies of scale.

  6. Decide How to Treat Brought Forward Reserves

    Each school within a MAT may have its reserves brought forward from previous years. Deciding how to treat these reserves under GAG pooling is an important step.

    Some MATs may pool these reserves, while others may allow schools to keep them. The decision should be clearly stated in the GAG pooling agreement.

  7. Appraisal Process

    Finally, implementing an appraisal process is crucial for evaluating the effectiveness of GAG pooling. This could involve regular reviews of financial performance, school feedback, and assessments of whether the GAG pooling meets its objectives.

    The appraisal process helps identify areas for improvement and ensures the GAG pooling strategy remains effective and beneficial for all schools within the MAT.

Tips for Successfully Implementing GAG Pooling

To help address the challenges in the organisational process, there are several things you can do to mitigate everything.

  • Communicate Clearly

    A key element of any successful change management plan is communication.

    Clear and transparent communication is key to overcoming resistance towards GAG pooling.

    Stakeholders, including headteachers and staff at all levels, should be informed about the process, its benefits, how funds will be allocated, and how it may affect them.

    Regular updates and an open-door policy for questions can help build trust, alleviate fears about the loss of autonomy, and avoid employee pushback during the process of change.

    It’s also important to communicate success stories and demonstrate the positive impact of GAG pooling on schools within the MAT.

  • Invest in Robust Financial Management Systems

    GAG pooling requires robust financial management systems and expertise. MATs must invest in developing or upgrading their financial systems to handle the complexities of managing a large, consolidated budget.

    This could involve hiring additional finance staff, training an existing finance team, or investing in financial management software.

    With a strong system in place, MATs can ensure effective management of pooled resources, reducing the risk of misallocation and promoting financial stability.

  • Cultivate a Collective Mentality

    Cultivating a collective mentality among the schools within a MAT is crucial for successfully implementing GAG pooling.

    This involves fostering a sense of collective responsibility and unity. Workshops, team-building activities, and regular inter-school meetings can help achieve this.

    The goal is to shift the mindset from ‘my school’ to ‘our schools,’ emphasizing that GAG pooling benefits the MAT as a whole.

  • Effective Governance Structures

    Developing clear and effective governance structures is another critical step.

    This involves setting up a decision-making process that is fair, transparent, and considers the unique needs of each school, as well as an appeals process to address any issues that may arise.

    When everyone understands the appeals mechanism, individual academies can speak up about appealing decisions they don’t agree with.

    A representative committee could be formed to oversee the management of pooled resources, with members from each school within the MAT.

    This central team would make strategic decisions about fund allocation, ensuring all member schools have a voice.

  • Advocate for Policy Change

    Advocacy for policy changes that support GAG pooling can help overcome legal and systemic hurdles. Lobbying relevant local authorities or working with education policy specialists can play a crucial role.

    By advocating for supportive policies, MAT leadership teams can ensure a more conducive environment for GAG pooling, helping to streamline its implementation and maximize its benefits.

Tips for successfully implementing gag pooling

Is GAG Pooling the Way to Go?

GAG pooling requires careful financial planning, robust systems, and ongoing monitoring.

By following these steps, MATs can ensure effective and efficient GAG pooling, leading to strategic resource allocation and improved financial stability for every school within the organization.

A centralized spend management software, like Planergy, can help MATs in many ways.

Giving better visibility of spend across schools, accurate real-time spend versus budget reports, report on expenditure by fund, enforce internal controls for purchasing, automate accounts payable processing, and much more.

What’s your goal today?

1. Use Planergy to manage purchasing and accounts payable

We’ve helped save billions of dollars for our clients through better spend management, process automation in purchasing and finance, and reducing financial risks. To discover how we can help grow your business:

2. Download our “Indirect Spend Guide”

Download a free copy of our guide to better manage and make savings on your indirect spend. You’ll also be subscribed to our email newsletter and notified about new articles or if have something interesting to share.

3. Learn best practices for purchasing, finance, and more

Browse hundreds of articles, containing an amazing number of useful tools, techniques, and best practices. Many readers tell us they would have paid consultants for the advice in these articles.

Related Posts

The post GAG Pooling: What Is It, Challenges, and Benefits appeared first on Planergy Software.

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Horizontal vs. Vertical Integration: A Comprehensive Guide https://planergy.com/blog/horizontal-vs-vertical-integration/ Tue, 12 Sep 2023 13:23:33 +0000 https://planergy.com/?p=15325 KEY TAKEAWAYS Horizontal Integration: This business strategy involves acquiring or merging with companies at the same level in the supply chain, leading to increased market share, cost savings, diversification, and competitive advantage. Vertical Integration: By taking control of different stages of the production or distribution process, businesses can gain supply chain control, reduce costs, increase… Read More »Horizontal vs. Vertical Integration: A Comprehensive Guide

The post Horizontal vs. Vertical Integration: A Comprehensive Guide appeared first on Planergy Software.

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What's Planergy?

Modern Spend Management and Accounts Payable software.

Helping organizations spend smarter and more efficiently by automating purchasing and invoice processing.

We saved more than $1 million on our spend in the first year and just recently identified an opportunity to save about $10,000 every month on recurring expenses with Planergy.

King Ocean Logo

Cristian Maradiaga

King Ocean

Download a free copy of "Indirect Spend Guide", to learn:

  • Where the best opportunities for savings are in indirect spend.
  • How to gain visibility and control of your indirect spend.
  • How to report and analyze indirect spend to identify savings opportunities.
  • How strategic sourcing, cost management, and cost avoidance strategies can be applied to indirect spend.

Horizontal vs. Vertical Integration: A Comprehensive Guide

Horizontal Vs Vertical Integration

KEY TAKEAWAYS

  • Horizontal Integration: This business strategy involves acquiring or merging with companies at the same level in the supply chain, leading to increased market share, cost savings, diversification, and competitive advantage.
  • Vertical Integration: By taking control of different stages of the production or distribution process, businesses can gain supply chain control, reduce costs, increase efficiency, and differentiate their products and services.
  • Challenges and Risks: Both horizontal and vertical integration present unique challenges, such as integration difficulties, regulatory hurdles, increased complexity, capital intensity, reduced flexibility, and potential conflicts.
  • Strategic Considerations: Understanding and selecting the right integration strategy can significantly impact a company’s growth and success. Companies should carefully weigh each approach’s benefits, challenges, and risks to make informed decisions that align with their goals and objectives.

In today’s rapidly evolving business landscape, companies must continually adapt and innovate to stay ahead of the competition.

One way businesses can achieve this is through strategic expansion, which often involves either horizontal or vertical integration.

In this blog post, we will explore these two critical concepts, their benefits, challenges, and differences, and how they apply to modern-day businesses.

What is Horizontal Integration?

Horizontal integration refers to a company expanding its operations by acquiring or merging with other companies operating at the same supply chain level.

This approach allows businesses to grow their market power, diversify their product offerings, and achieve economies of scale.

Examples of Horizontal Integration

A classic example of horizontal integration is when Facebook acquired Instagram and WhatsApp. 

These acquisitions allowed Facebook to consolidate its dominance in the social media space, eliminate potential competitors, and expand its user base.

Amazon’s acquisition of Whole Foods in 2017 exemplifies a horizontal integration strategy, as it allowed the e-commerce giant to enter the grocery market and enhance its physical retail presence.

Disney’s acquisition of Pixar in 2006 marked a significant milestone in the entertainment industry, as it brought together two giants of animation.

The acquisition proved to be mutually beneficial for both companies. For Disney, it rejuvenated its animation division by gaining access to Pixar’s cutting-edge technology, creative talent, and innovative storytelling techniques.

This led to a series of successful animated films under the joint banner, such as “Up,” “WALL-E,” and “Inside Out.”

On the other hand, Pixar benefited from Disney’s vast distribution network, marketing expertise, and resources, which helped expand the reach and impact of Pixar’s films worldwide.

Ultimately, the strategic collaboration between Disney and Pixar resulted in a powerful synergy that strengthened both companies’ positions in the animation market and created memorable content for audiences globally.

Pixar isn’t the only noteworthy acquisition from Disney. The business expansion allowed Walt Disney Company to expand its content portfolio and increased its market share by acquiring 21st Century Fox in 2019.

In the technology sector, Microsoft’s acquisition of LinkedIn in 2016 enabled the company to expand its suite of business services, while Google’s purchase of YouTube in 2006 helped it solidify its presence in the online video market.

These examples demonstrate how acquiring companies at the same level of the value chain can lead to growth and competitive advantages.

What is Vertical Integration?

There are two main types of vertical integration: forward (downstream) integration and backward (upstream) integration.

Each type involves taking control of different levels of the production or distribution process to achieve various strategic objectives.

  • Forward (Downstream) Integration

    This type of vertical integration occurs when a company expands its control toward the end of the supply chain, moving closer to the final customer. This can involve activities such as acquiring or establishing distribution channels, retail outlets, or service centers.

    Forward integration allows a company to gain more control over sales, distribution, and customer relationships and can lead to increased market share, improved profit margins, and enhanced customer experiences.

    Example: A car manufacturer acquiring a chain of dealerships to sell its vehicles directly to consumers.

  • Backward (Upstream) Integration

    In contrast, backward integration refers to a company’s expansion toward the beginning of the supply chain, taking control of the production of raw materials or components used in its products.

    This can involve activities such as purchasing suppliers, acquiring mines or farms, or establishing manufacturing facilities. Backward integration enables a company to secure its supply chain, reduce production costs, enhance quality control, and potentially create barriers to entry for competitors.

    Example: A smartphone manufacturer acquiring a company that produces microchips or other essential components for its devices.

Examples of Vertical Integration

A well-known example of vertical integration is Apple’s decision to design and manufacture its chips in-house. 

By doing so, Apple gained greater control over its supply chain, reduced reliance on external suppliers, and enhanced its ability to innovate and differentiate its products.

Tesla’s decision to build its own battery factory, the Gigafactory, demonstrates a forward vertical integration strategy, as it allowed the electric vehicle manufacturer to secure its supply chain and reduce production costs.

In the fashion industry, Zara’s parent company, Inditex, manages its entire production process, from design to distribution, enabling it to quickly adapt to market trends and maintain tight control over quality and cost.

Netflix’s move into producing original content, such as “House of Cards” and “Stranger Things,” showcases a successful backward vertical integration as the streaming giant expanded its role from content distributor to content creator.

These examples highlight how companies can benefit from taking control of different stages of the production or distribution process through vertical integration strategies.

Understanding the differences between these growth strategies is crucial for any company considering making any move. Self-sufficiency has its benefits, but may also lead to a company’s downfall.

Benefits of Horizontal and Vertical Integration

Both horizontal and vertical integration offer unique advantages for businesses looking to expand:

  • Benefits of Horizontal Integration

    • Increased Market Share: Boosting Your Presence Through Acquisition and Mergers

      Horizontal integration allows companies to quickly gain a larger market share by acquiring or merging with competitors.

      This strategy can significantly increase a company’s presence, customer base, and overall market influence. A larger market share often leads to increased brand recognition, customer loyalty, and the ability to set prices favorably.

    • Cost Savings: Achieving Economies of Scale Through Consolidation

      One of the key benefits of horizontal integration is the potential for cost savings. By consolidating operations and leveraging shared resources, companies can achieve economies of scale, which result in lower costs per unit.

      This can lead to increased profit margins, greater financial stability, and the ability to invest in innovation and growth. Additionally, cost savings can be passed on to customers, making products and services more competitive in the marketplace.

    • Diversification: Reducing Risk by Expanding Product Offerings

      Horizontal integration can also help companies diversify their product offerings and reduce reliance on a single market segment.

      By expanding into new markets or adding complementary products and services, businesses can mitigate risks associated with changes in consumer demand, economic fluctuations, and industry disruptions.

      Diversification can also open up new revenue streams, making the company less vulnerable to downturns in any one area of the business.

    • Competitive Advantage: Eliminating Competition and Strengthening Market Position

      Finally, horizontal integration can provide a significant competitive advantage by eliminating competition and strengthening a company’s position in the market.

      By acquiring or merging with competitors, businesses can consolidate their market presence, making it more difficult for new entrants to gain a foothold. This strategy can also lead to increased bargaining power with suppliers and customers and the ability to dictate industry standards and trends.

      In short, horizontal integration can create a formidable market force that is difficult for competitors to challenge.

  • Benefits of Vertical Integration

    • Supply Chain Control: Gaining Greater Oversight and Quality Assurance

      Vertical integration allows companies to gain greater control over their supply chain, ensuring quality and timely delivery of products.

      By taking ownership of various stages in the production process, businesses can closely monitor quality standards, optimize inventory management, and reduce the risk of disruptions caused by external suppliers.

      This level of control can lead to increased customer satisfaction, brand reputation, and a competitive edge in the market.

    • Cost Reduction: Streamlining Production and Distribution Costs

      Eliminating intermediaries through vertical integration can often result in cost reductions associated with production and distribution.

      By owning multiple stages of the production process, businesses can minimize the markups and fees charged by third-party suppliers and distributors. This streamlined approach can lead to lower operating costs, increased profit margins, and more competitive customer pricing.

    • Increased Efficiency: Optimizing Processes and Communication

      Vertical integration enables companies to streamline processes and improve communication between different stages of production.

      By consolidating operations under one organizational umbrella, businesses can eliminate redundancies, enhance coordination, and foster a more collaborative environment.

      This increased efficiency can result in faster production times, reduced waste, and the ability to respond more quickly to changes in market demand.

    • Differentiation: Creating Unique Products and Services

      Owning various stages of the production process can enable businesses to create unique products and services that set them apart from competitors.

      Vertical integration allows companies to innovate and customize their offerings more effectively, as they have direct control over the entire production and distribution process.

      This can lead to the development of proprietary technologies, exclusive features, and tailored solutions that meet specific customer needs. Differentiation can help businesses establish a strong brand identity and build customer loyalty.

Benefits of horizontal and vertical integration

Challenges and Key Differences Between Horizontal and Vertical Integration

While both approaches offer significant benefits, they also present unique challenges and risks:

  • Horizontal Integration Challenges

    • Integration Difficulties: Navigating Operational, Cultural, and Legal Challenges

      Merging with or acquiring other companies can lead to several integration difficulties that must be carefully managed. Operational challenges may include consolidating systems, processes, and resources and aligning company goals and strategies.

      Cultural challenges may arise due to differences in organizational values, communication styles, and employee expectations. Creating a positive company culture will need to be managed over a more complex business structure.

      It might introduce new management challenges, like the need to manage a distributed workforce or the need to face the challenges of managing remote teams.

      Legal challenges can involve navigating regulatory requirements to avoid oligopolies and monopolies, contract negotiations, and potential disputes.

      Successful integration requires careful planning, open communication, and a willingness to adapt and compromise.

    • Regulatory Hurdles: Addressing Antitrust Concerns and Compliance

      Horizontal integration can sometimes attract antitrust scrutiny from regulatory authorities due to potential anti-competitive effects. Acquiring or merging with competitors can lead to market concentration, reduced competition, and the potential for monopolistic practices.

      To avoid regulatory hurdles, companies must carefully assess the competitive landscape, consider the impact of their actions on market dynamics, and ensure compliance with all relevant laws and regulations.

    • Increased Complexity: Managing Growth and Coordination Challenges

      Expanding horizontally can complicate a company’s operations, making managing and coordinating activities harder. As they grow, businesses may face communication, decision-making, and resource allocation challenges.

      Maintaining a unified vision and culture while integrating diverse teams, products, and markets can become increasingly difficult.

      To overcome these challenges, companies must invest in strong leadership, efficient systems and processes, and a culture of collaboration and continuous improvement.

  • Vertical Integration Challenges

    • Capital Intensive: Investing in Infrastructure, Technology, and Human Resources

      Vertical integration often requires significant infrastructure, technology, and human resources investments. Companies must be prepared to invest in facilities, equipment, and systems necessary to manage various stages of the production process.

      Additionally, they may need to hire and train new employees to handle the increased scope of operations. While these investments can lead to long-term benefits, they can also strain a company’s financial resources and require careful planning and risk management.

    • Reduced Flexibility: Adapting to Changing Market Conditions

      Owning multiple stages of the production process can make it more challenging for companies to adapt to changing market conditions.

      When a business is vertically integrated, it may be less able to quickly pivot its operations or outsource specific tasks in response to fluctuations in demand or shifts in industry trends.

      This reduced flexibility can make it harder for companies to stay agile and responsive to customer needs, which is crucial for maintaining a competitive edge in today’s fast-paced business environment.

    • Potential Conflicts: Navigating Internal Tensions and Aligning Interests

      Vertical integration can sometimes lead to conflicts of interest between different divisions within a company. For example, a division responsible for producing raw materials might prioritize its own profitability over the needs of the division responsible for manufacturing finished products, leading to internal competition and tension.

      To avoid these potential conflicts, companies must establish clear communication channels, align incentives and objectives across divisions, and foster a culture of collaboration and mutual support.

      This may involve implementing cross-functional teams, setting shared performance metrics, and promoting organizational transparency.

      Organizations that understand these differences and select the appropriate integration strategy can significantly impact your business’s growth and success.

      By carefully considering the benefits, challenges, and risks associated with horizontal and vertical integration, you can make informed decisions that align with your company’s goals and objectives.

Challenges and key differences between horizontal and vertical integration

How Companies Can Benefit from the Right Integration Strategy

Organizations must adapt to the changing business landscape by leveraging the right integration strategy. 

Horizontal integration can help these companies expand their customer base, diversify their product offerings, and enhance their market position.

Vertical integration can enable purchasing software providers to offer end-to-end solutions, improve supply chain efficiency, and differentiate themselves from competitors.

The choice between horizontal and vertical integration depends on your company’s specific goals, resources, and market dynamics. 

Using market opportunity analysis can help identify the right route to take.

By thoroughly understanding these concepts and considering their benefits, challenges, and risks, purchasing companies can make strategic decisions that drive growth, innovation, and long-term success.

What’s your goal today?

1. Use Planergy to manage purchasing and accounts payable

We’ve helped save billions of dollars for our clients through better spend management, process automation in purchasing and finance, and reducing financial risks. To discover how we can help grow your business:

2. Download our “Indirect Spend Guide”

Download a free copy of our guide to better manage and make savings on your indirect spend. You’ll also be subscribed to our email newsletter and notified about new articles or if have something interesting to share.

3. Learn best practices for purchasing, finance, and more

Browse hundreds of articles, containing an amazing number of useful tools, techniques, and best practices. Many readers tell us they would have paid consultants for the advice in these articles.

Related Posts

The post Horizontal vs. Vertical Integration: A Comprehensive Guide appeared first on Planergy Software.

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Accounts Payable Cash Flow: How AP Impacts Cash Flow and Your Cash Flow Statement https://planergy.com/blog/accounts-payable-cash-flow/ Mon, 21 Aug 2023 15:23:42 +0000 https://planergy.com/?p=15215 IN THIS ARTICLE What Are Accounts Payable? How Does an Increase in Accounts Payable Affect Cash Flow? How Does a Decrease in Accounts Payable Affect Cash Flow? How Can You Manage Accounts Payable to Improve Cash Flow? How Accounts Payable Affects Cash Flow Are Accounts Payable Included in Cash Flow? Best Ways To Improve Cash… Read More »Accounts Payable Cash Flow: How AP Impacts Cash Flow and Your Cash Flow Statement

The post Accounts Payable Cash Flow: How AP Impacts Cash Flow and Your Cash Flow Statement appeared first on Planergy Software.

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What's Planergy?

Modern Spend Management and Accounts Payable software.

Helping organizations spend smarter and more efficiently by automating purchasing and invoice processing.

We saved more than $1 million on our spend in the first year and just recently identified an opportunity to save about $10,000 every month on recurring expenses with Planergy.

King Ocean Logo

Cristian Maradiaga

King Ocean

Download a free copy of "Preparing Your AP Department For The Future", to learn:

  • How to transition from paper and excel to eInvoicing.
  • How AP can improve relationships with your key suppliers.
  • How to capture early payment discounts and avoid late payment penalties.
  • How better management in AP can give you better flexibility for cash flow management.

Accounts Payable Cash Flow: How AP Impacts Cash Flow and Your Cash Flow Statement

Accounts Payable Cash Flow

Even though accounts payable is an expense your company incurs when purchasing goods or services on credit, properly managing accounts payable can result in a long list of benefits for your business, including increasing your cash flow, if you plan carefully.

What Are Accounts Payable?

Accounts payable are the goods and services purchased by a company on credit with a short-term due date.

An accounts payable balance on your general ledger represents the amount of money you currently owe for those goods and services and is always classified as a liability.

Historically, the AP department has been viewed as the department that paid the bills, but recently, businesses have begun to view AP in a different light, understanding the important role the AP department plays in their business.

As a result of this increased awareness and better AP management, businesses large and small are better able to reap the benefits that improved AP management brings, including increased cash flow.

How Does an Increase in Accounts Payable Affect Cash Flow?

An increase in accounts payable can positively affect your cash position since accounts payable is money owed to a vendor or creditor that has not yet been paid. 

Even though accounts payable is a liability on your income statement, since the payment has yet to be made, an increase in accounts payable means an increase in available cash flow for that accounting period.

How Does a Decrease in Accounts Payable Affect Cash Flow?

A decrease in accounts payable decreases liability on your income statement but it will also decrease cash flow.

Though a decrease in accounts payable has a positive impact on your financial statements, it reduces the total amount of cash available, with the decrease representing the total amount of cash transactions that have been paid over a specific period of time.

How Can You Manage Accounts Payable to Improve Cash Flow?

Better AP management always starts with better credit terms. For instance, if your typical credit terms are currently Net 30, that means that you only have 30 days to hold onto cash before you’re required to pay vendors and suppliers.

However, if you could negotiate Net 45 or Net 60 terms, you’d be able to hold onto cash for an additional 15 days or even longer.

Of course, improving your cash flow is not a good reason to delay payment on accounts payable past their due date, since a delayed payment often results in late payment fees, increased interest, and a possible change in your current credit terms.

How Accounts Payable Affects Cash Flow

Your accounts payable balance should always be considered a source of cash since it represents money not paid to vendors or suppliers. Here’s how.

If your typical turnaround time to pay vendors is 30 days, and your average AP balance is around $50,000, if your payment terms were to change to 60 days, you would increase your short-term cash flow by $50,000.

This increase in cash flow can help you pay bills that are due earlier, invest in equipment, purchase additional supplies for resale, or make other investments in the company.

On the other hand, if you were to default on your regular payments and your vendors were to reduce your payment terms from Net 30 to Net 15, this would have a negative impact on your cash flow, reducing available cash by half.

Whatever your current payment terms are with your vendors and suppliers, it’s essential that you pay your bills by the due date and maintain a good relationship with your suppliers across the board.

Are Accounts Payable Included in Cash Flow?

Cash flow is always calculated on a cash basis, dealing directly with cash inflows and cash outflows.

For example, on your income statement, which displays revenue and expense balances that are based on accrual accounting, the accounts payable balance is listed as a negative against revenue, since it’s money that is owed to vendors and suppliers.

However, on your statement of cash flows, which is calculated on a cash basis, accounts payable is not considered a negative, since the accounts payable balance represents money that is owed, but not yet paid.

As an example, let’s say you have $250,000 in income and $40,000 in accounts payable. 

On your income statement for April, you’ll subtract the $40,000 from the $250,000, leaving you with $210,000 in net income for the month.

For your cash flow statement, you start with $210,000 in available cash and need to add back the $40,000 accounts payable balance since it hasn’t been paid yet, leaving a cash flow balance of $250,000.

Remember that you would have to adjust any accounts receivable balances as well. 

For example, if you had an accounts receivable balance of $50,000, you would need to subtract it from your cash flow statement, since the money has not yet been received, leaving you with an available cash balance of $200,000.

It can be confusing to switch back and forth between accrual accounting and cash accounting, but it’s necessary to calculate your net cash flow.

Best Ways To Improve Cash Flow Management

Improved cash flow management starts with better accounts payable management.
One of the easiest ways to improve AP management is to make the switch to using AP Automation.

An automated AP application like Planergy, which eliminates time-consuming manual AP processes while providing you with real-time reporting and up-to-date, accurate accruals.

Other ways to improve cash flow include:

  • Improve Invoice Processing Time

    Improving invoice processing time can save you a significant amount of time and money, while also eliminating late fees and other penalties.

    Improving invoice processing time also reduces labor hours, which in turn reduces payroll costs, while also allowing you to take advantage of any early payment discounts that may be offered.

    The best way to achieve this is by introducing AP Automation into your accounts payable process.

  • Improve Visibility of Committed Spend

    Committed spend is part of the spend management process, which is used to manage company funds using measures such as procurement, outsourcing, and supply chain management to better meet established company spending goals.

    Committed spend refers to goods and services that have been ordered but not yet paid for.

    Having real-time spend visibility of spend allows you to better manage cash flow by understanding when you will be required to make payments related to purchases.

    Centralized spend data helps to achieve this. Committed spend report is a standard report in Planergy.

  • Properly Account for GRNI

    Another form of committed spend is goods received not invoiced or GRNI. GRNI accounts are useful for businesses that utilize an automated perpetual inventory system.

    Any goods received will be automatically recorded into your accounting software application before an invoice has been received. Once an invoice has been received, you can reverse the original GRNI entry.

  • Have Access to Real-time Reports

    Having access to real-time reports gives you a more concise look at both AP and cash flow.

    Instead of having to add and subtract items from your financial statements, having real-time reports gives you an accurate picture of both your AP balance and your cash flow balance on demand.

  • Use Automation to Better Forecast Your Cash Flow

    Using automated spend management software and an automated accounting software application lets you better monitor both incoming revenue and outgoing expenses.

    Part of managing cash flow is knowing how much money you expect to have at any given moment while offering more accurate budgeting capability.

Best ways to improve cash flow management

What Is The Flow of Accounts Payable?

Since accounts payable is considered a current liability, it is recorded on a company’s balance sheet as soon as an invoice is entered.

As invoices are added to accounts payable, the balance of the liability account increases; increasing available cash flow as well. The longer a business is able to hold onto company funds and not pay an invoice, the more consistent its cash flow levels will be

What Is the Difference Between Cash Flow and Accounts Payable?

Your company’s cash flow is the money that flows into and out of your business and is always calculated based on real-time activity, not accruals.
This incorporates both accounts receivable, for incoming cash, and accounts payable, for outgoing cash.

For example, when you purchase goods and services on credit, you’re actually increasing your cash flow level, while also increasing your accounts payable balance. When it’s time to pay for those same goods and services, your cash flow balance will decrease.

If you purchase pens and paper from your local office supply store and pay for them immediately, you immediately reduce your cash flow balance.

However, if you purchase pens and paper on credit, with Net 30 terms, your cash flow increases until the pens and paper are paid for.

Where Does Accounts Payable Fit on a Cash Flow Statement?

Accounts payable activity falls under operating activities, which is the first section of the cash flow statement.

In total, there are three activities sections on a cash flow statement.

  1. Operating Activities

    Cash flow from operating activities covers the company’s operating cash in from the sales of goods and services, tax payments, interest payments, and other cash payments made to vendors and suppliers.

    Cash flow from operations also includes employee wages and payments made for general business activities.

  2. Investing Activities

    Cash flow from Investing activities covers the purchase or sale of company assets, loans made, or payments received, as well as changes in equipment or other assets.

    For example, if you purchase new equipment for your factory, the cost would be considered investing activity. If you decide to sell the old equipment, the proceeds from the sale would also be considered an investing activity.

  3. Financing Activities

    Cash flow from financing activities includes cash from investors and dividends paid to investors.

Where does accounts payable fit on a cash flow statement

There are two methods commonly used when preparing a cash flow statement.

The direct method uses only cash and real-time totals and is useful for small businesses that use cash basis accounting, while larger businesses will want to use the indirect method, which uses information from a balance sheet and income statement.

Other Ways To Improve Cash Flow

Aside from properly managing accounts payable, there are other ways to improve cash flow for your business.

  • Make Sure Vendor and Supplier Payments are on Time

    Having a strategy in place that takes advantage of vendor payment terms to improve cash flow is a great strategy, but not if you pay your vendors late.

    This can result in invoice late fees, lost early payment discounts, and negatively impact supplier relationships.

    While it may be tempting to withhold payment to hold onto cash, the long-term ramifications of that decision such as a change in payment terms, revocation of credit, and additional interest rates can quickly negate any advantages you may incur.

  • Invoice Customers Promptly

    Your shipping department may be on the ball, but if you don’t promptly invoice your customers for orders, your cash flow will suffer.

    Invoice when an order is shipped and be sure to provide your customers with plenty of different payment options, such as accepting credit cards, ACH transfers, or direct deposit.

    Also, be sure to request an upfront deposit for any large orders or orders that require extensive customization.

  • Follow Up Early On Unpaid Sales Invoices

    Don’t wait until an invoice is past it’s due date to follow up with your customers.

    Sending reminders before the payment is due can be extremely helpful. And it’s important to continue to send those reminders until payment has been received.

  • Charge a Late Payment Fee

    If your customers are routinely late paying their invoices, consider implementing a late payment fee.

    Explain the particulars of the fee to all of your customers and be sure to follow through on assessing the penalty for any customer that sends in payment late.

  • Review Company Expenses Regularly

    While managing AP properly can go a long way towards improving your cash flow, spending time reviewing company expenses across the board may also improve cash flow for your business.

Other ways to improve cash flow

Improving Accounts Payable Management Improves Cash Flow

Positive cash flow is the goal of CPAs and bookkeepers alike.

Better management of accounts payable can help you avoid negative cash flow, manage a comfortable level of liquidity for your business, and keep business operations running smoothly.

In many instances, having enough cash on hand can mean the difference between remaining in business and closing your doors.

If you’re still processing AP manually, switching to a dedicated procure-to-pay software that incorporates an automated AP application, like Planergy, can streamline the entire AP process, provide real-time financial reporting options, and help increase your cash flow.

What’s your goal today?

1. Use Planergy to manage purchasing and accounts payable

We’ve helped save billions of dollars for our clients through better spend management, process automation in purchasing and finance, and reducing financial risks. To discover how we can help grow your business:

2. Download our guide “Preparing Your AP Department For The Future”

Download a free copy of our guide to future proofing your accounts payable department. You’ll also be subscribed to our email newsletter and notified about new articles or if have something interesting to share.

3. Learn best practices for purchasing, finance, and more

Browse hundreds of articles, containing an amazing number of useful tools, techniques, and best practices. Many readers tell us they would have paid consultants for the advice in these articles.

Related Posts

The post Accounts Payable Cash Flow: How AP Impacts Cash Flow and Your Cash Flow Statement appeared first on Planergy Software.

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