Month: December 2022

While online shopping is nothing new, during the global lockdowns during the Covid-19 pandemic, this trend grew exponentially.

It was safer and more convenient to buy online.

This transformation in retail buying has also transformed how businesses operate. Companies today have to fulfil customer demands, ensure prompt delivery, and generally deliver excellent service – or else, they will simply move to the next company.

Businesses have to manage their inventory and supply chain efficiency to be able to satisfy consumer demands; eCommerce fulfillment basically means delivering the correct quantity and quality of products on the promised date. If you are not able to, you will stand to lose customers.

ALSO READ: What is Inventory Reorder Point?

What is Lead Time?

The time taken for a product to reach the customer from the time they place the order is called the lead time.

Every business must strive to shorten this time as much as possible so that they can create great customer experiences and satisfy their demands.

The longer the lead time, the more money and resources you use, and the more inefficient your business becomes.

What is Lead Time Reduction?

This is simply reducing the time taken for delivering a customer’s order from the time they place the order.

Lead time management is all about improving the flow so that the entire process becomes smooth.

This means every process from procurement through sales to shipping has to be seamless, quick, and hassle-free so that you minimize the time taken from start to finish.

Both manufacturers and retailers are today taking steps to enhance consumer access to a wider array of goods and decrease expenses.

ALSO READ: Why is Cycle Stock Important for Your Business?

Why is Lead Time Reduction Important?

Implementing a lead time reduction strategy will help you understand and manage your supply chain better, and be well-equipped to alleviate risks and improve your financial performance.

In fact, once the lead time is reduced, your risk will be negligible, and the supply chain will deliver better customer service.

Your company will be able to fulfil consumer demand and increase profitability, helping you accelerate your growth beyond what you thought possible even.

The chief objective of lead time reduction is delivering the right product to the customer at the right time and right price.

For this, you need to constantly monitor and assess multiple parameters of operations and simultaneously attempt to increase efficiencies.

ALSO READ: Common Inventory Management Mistakes to Avoid

Benefits of Reducing Lead Time

Lead time in inventory and supply chain can lead to delayed deliveries and unhappy customers.

Let’s look at the advantages of decreasing the lead time.

1. Competitive Edge

With automation in your processes, you can reduce lead time without spending much.

There are customizable solutions available, which help you save money while fulfilling production goals.

You can score over your competition by being the first to market.

ALSO READ: What is Pipeline Inventory and Decoupling Inventory?

2. Gain Consumer Trust

By making improvements in supply chain, logistics, and inventory management, you can become more reliable, deliver products to customers quicker and build trust.

This will also help you to avoid stock-outs, and make use of all sales opportunities and gain new customers.

3. Increase Cash Flow

When you reduce the time taken to deliver a product to the consumer from the time you receive it from your vendor, it significantly improves your cash flows.

4. Increased Inventory Turnover

Inventory turnover refers to the number of times your inventory is sold and replaced; a high turnover means you have good sales.

Reducing lead times can lead to more orders and sales, which means your products get sold faster; this way you can avoid obsolete and dead stock.

ALSO READ: Key Steps for Successful Demand Planning 

Process Time Vs Lead Time

Process time also focuses on time, but worked on by an individual working on a specific task, and includes waiting and walking time.

Strategies that look at minimizing process time ignore many activities in the entire supply chain.

Whereas lead time is the time required from the time a customer’s order is accepted and processed through the supply chain, through production to shipping.

Strategies to Reduce Customer Lead Time

Decreasing lead time in supply chain can help you reduce customer lead time as well.

It is important to understand your supply chain well as it will help in identifying areas of improvement, especially for visibility and control.

By implementing a state-of-the-art supply chain, you can get a virtual picture about it and processing times for each section, helping you see where you can improve things and gain an edge.

ALSO READ: Advantages of ABC Analysis in Inventory Management

1. Eliminate Non-value-adding Activities

This includes waiting for information to take any action, conducting nonessential meetings, holding high inventory, moving safety stocks, and other unnecessary activities.

With proper planning, you can ship and deliver customer orders quickly and consistently.

Tranquil ERP has robust inventory management software that helps in managing your inventory efficiently and reduce costs, making products available quickly so that you can focus on increasing revenues.

2. Eliminate Unreliable Vendors

If any vendor consistently delivers your orders late, it may be time to say goodbye to them.

They may cost you more than finding another supplier.

Evaluating your vendors will have a positive effect on your financial performance even if you consider the transition cost.

Just make sure that you have enough stock to last you in the transition period, and that your new vendor can start delivering goods immediately.

ALSO READ: Ways to Improve the Procurement Process

3. Select Vendors That Are Close

The marketplace is global today, giving you access to suppliers the world over; however, you may have to wait for a long time to get deliveries, increasing your lead time, and complicating the process of returns.

It would make sense to prioritize vendors who are near your manufacturing unit or warehouses.

If it’s a matter of price and/or quality, order from your overseas in larger quantities but less frequently.

Sourcing locally can help you reduce lead time and save in shipping cost; so you can order when you’re running out and your overseas shipment still has time to arrive.

4. Inform Vendors of your Demand Forecasts

Businesses in industries with fluctuating demands can experience varying demands every month.

So, when you’re expecting higher demand, it’s a good idea to inform your suppliers early on so that they are prepared to fulfil a larger order quickly.

ALSO READ: Tips For Efficient Stocktaking

5. Increase your Capabilities

If you outsource some of your processes, think about handling that in-house so that you can stop sending your products to third parties for finishing.

While it may cost you initially, you will save in the long run, and cut down lead time significantly and for good, making it a feasible option.

This will also form your infrastructure for future growth. You will be able to scale easily as your business grows, and you earn more profit.

6. Automate Order Processing Workflows

When you’ve got the raw materials and are about to start manufacturing, ensure that internal processes are efficient so that production lead time is decreased.

Think about how long you need to enter customer orders in your system, how often orders get lost, the time taken to produce goods and move them through QA, and how many times poor communication causes delays in production.

In case your performance in one or more of these areas isn’t good, you’re likely to have lengthy lead times.

Order processing workflow automation can help you roll out finished goods faster.

Automation includes robotics, barcodes, RFIDs, and strategies that reduce human effort in operations.

ALSO READ: Challenges in ERP Implementation

7. Complete Several Processes Simultaneously

Certain processes are dependent on others being completed to start, and there is nothing you can do about that.

However, many are independent of one another; identify such processes and run them simultaneously to boost productivity and cut down lead times more.

8. Enhance Inter-Departmental Communications

Order processing involves multiple departments, and hence collaboration is essential.

To collaborate, it’s a given that proper communication is necessary.

Certain steps may necessitate inputs from several employees from different departments, and it is critical that there is no confusion.

Also, it is better to avoid using paper for these processes and switch to a software system like Tranquil which automatically routes documents to the relevant employee or department in order of priority, and alerts those individuals about taking action on specific documents.

ALSO READ: What is Batch Tracking?

9. Communication with Customers

While this does not actually help you decrease lead time as such, you can keep customers informed regarding their order status; this will help them stay loyal and prepare them to wait, as they are aware of what is happening with their order.

You can implement Tranquil ERP which will help you do this automatically.

This way you can set customer expectations and boost satisfaction.

10. Change Shipping Methods

Even little changes made to your shipping methodology can give you better control over delivery schedules and help decrease expenses.

Explore the shipping methods available to your for the type of products you have and work out which methods will be quicker and more economical.

ALSO READ:  Critical Factors for a Successful ERP Implementation

11. Vertical Integration

This strategy is used by businesses to make up for the time that is lost in shipping goods.

The company produces its raw materials and components, rather than purchase them; this can significantly reduce lead times.

Of course, it will necessitate heavy financial investment at the outset, but in the long run, it will help save money on overheads, reduce time, and help to scale the business.

ALSO READ: Important ERP Implementation KPIs to Know

12. Layout Planning

Obstacles to flow include batch-oriented machines, lengthy configuration times, long distances, poor maintenance, and so on.

This can be improved with layout planning.

This has several steps, from how you organize data to how you can avoid supply chain conflicts.

Lean layouts often focus on minor and unimportant things like waste management and decreasing changeover time, but layout planning concerns itself with the overall picture, like the way your facility is organized, where the waste is, and how the whole organization can be redesigned to align with just-in-time and flow concepts.

Having a visual representation of this layout will benefit all stakeholders.

ALSO READ: ERP Software to Enhance your Purchase Management

13. Quantifying Lead Time Reduction

Now this can be a little difficult especially when you are doing it on an operational level, as the lead time can differ according to the department, and operation in your company.

It is important to identify which department or operation has the longest lead time.

This can be established with an effective quality assurance audit or a thorough root cause analysis; you can also do it visually.

A graphical mapping tool like 3D visualization, spaghetti diagrams, or value stream analysis will help the participants to recognize wastage, and ideas to improve things.

They will be able to understand how much time it takes from the time a customer order is received till it is delivered to their doorstep.

The results of this study can be used as a basis to take remedial measures and to report to the management regarding the measures taken to improve lead time over time.

ALSO READ: Guide on How Do ERP Systems Work

Tranquil is a prominent cloud-based ERP software system that helps you to manage your projects and business work in a hassle-free way. Moreover, with this software, you can access your business data anywhere, any time. If you want to manage an ERP software system, you can get in touch with Tranquil BS.

 

Materials are needed for every business, whether they are manufacturers, retailers, construction companies, or consultants.

Basic office supplies, raw materials, equipment, machinery, and services – are the materials needed by most businesses.

The question is how to manage these purchases properly; by allowing department heads to directly place orders with vendors, it could lead to increased or fraudulent expenditures.

ALSO READ: How to Choose an ERP Software to Enhance your Purchase Management?

Let’s understand this with an example:

The IT department in a company needs a few printers as the workload has increased as have employees.

Do you tell the IT department manager to go out and purchase the printers they want?

If you do, there is always the possibility of misuse of company funds: bills can be inflated either by showing more printers or higher price when it is not so in reality. Or they may buy more than what your company budget can allow.

This can harm your financial planning and have a negative impact on your cash flow.

Budget overshooting can happen inadvertently too; employees may not be aware of budget restrictions and accidentally overshoot it.

Therefore, most companies have standardized processes for purchasing, with proper approval workflows.

In the event your company has increased scrutiny over expenditure, is on a tight budget, or is facing problems with cash flow, it would be wise to put in place a standard purchase process so that unnecessary expenditure can be controlled.

The entire process begins with a purchase requisition form, which gives rise to a purchase order.

ALSO READ: Challenges Facing Purchasing and Supply Management

What is a Purchase Order?

Once the purchase department receives a purchase requisition and approves it, they generate a purchase order with all the details like quantity, specifications, and so on, and send it to the vendor.

A PO is a binding contract that mentions exactly what a company wants to purchase.

What is a Purchase Requisition?

Purchase requisitions are typically used when purchases are required to be made by different departments on the organization’s behalf.

It is a form used by department managers to inform purchase officers about a requirement for materials for which purchase is necessary.

This triggers the purchase process and the finance team in turn uses the document to coordinate with the accounts department and make necessary entries in the company’s books.

It’s an internal document used by employees to purchase goods or services for their company.

They may be inventory, manufacturing requirements, or office supplies and equipment necessary for business operations.

The first step in the purchase process is submitting this form to the purchase department; it also creates a proper audit trail for the purchase.

On approval of the purchase requisition, the purchase department generates the PO and sends it to the relevant vendor.

ALSO READ: Difference Between Procurement And Purchasing

What Does a Purchase Requisition Form Contain?

A purchase requisition form has the following information:

• Name, department, and designation of the employee making the request
• Date
• Products requested (or services)
• Details of products and their quantities
• Estimated price
• Reason why it’s being purchases
• Vendor name

Steps Involved In The Purchase Requisition Process

While individual companies may have their own steps for purchase requisition, the basic workflow goes something like this:

1. Submitting the Requisition Form

When a staff member identifies that there is a need for certain goods, he requests purchase of those items.

This is done when they fill out a form which contains details of what they want to buy.

This can be done manually or using software.

ALSO READ: Ways to Improve the Procurement Process

2. Line Manager Approval

An internal approval process takes place where the line manager of the requesting employee’s department checks if the need is genuine and legitimate.

They will also verify that the purchase value does not overshoot the allotted funds for the department.

3. Inventory Check

The next step in the process is sending the purchase requisition form to the inventory department, where they check if the requested product is available in the company’s inventory.

if it is in stock, the department is so informed, and the products are sent over.

If there are no products in stock, the form is forwarded to the purchase department.

4. Purchase Department Screening and Approval

Once the purchase department receives the request, the purchase manager or designated employee processes the form.

They will identify the business need, verify the legitimacy of the request, and check if the form is properly signed and authorized.

If any details are missing, the officer may either return the form to the requesting employee for filling them in or complete them himself.

If he finds that the request is not valid or genuine, or overshoots the allotted limit, he may reject the requisition form and return it to the department or requesting employee with reasons for the rejection.

ALSO READ: Essential Procurement KPIs You Cannot Ignore

5. Generating Purchase Order

Once the requisition form has been approved completely, the purchase department generates a purchase order with all details and sends it to the supplier.

On accepting the PO the supplier is legally bound to fulfil the terms of the document.

6. Order Delivery and Assessment

The products are shipped by the supplier, and on arrival, the purchase department or warehouse staff verifies that the quality and quantity delivered are as per the purchase order.

A three-way verification process is carried out to check the invoice, packing slip and purchase order to confirm order accuracy.

This way, the company ensures that they are only paying for the items that were ordered and received, nothing more.

Returns if any are handled by the warehouse staff or the purchase department’s receiving team.

7. Paying the Invoice

Once the delivery is verified as correct, the PO is closed and the invoice is sent for approval to the finance team.

They enter it in the books of account as accounts payable, and make payment on the due date.

ALSO READ:  Challenges in Procurement and Supply Chain 

The Purpose of Purchase Requisition

We have already seen that if individual department managers are allowed to directly place orders for products they require, there is a higher chance of fraud and overspending.

It is to eliminate this that organizations create a procurement department with standardized procedures to procure goods and services on behalf of various departments.

When a specific process or workflow is followed by the purchase team, it not only minimizes possibility of fraud, but also creates an audit trail so that responsibility is fixed on every individual involved in a particular purchase.

An important internal document used to make purchases is a purchase requisition form.

This form enables teams to convey important information regarding purchase requirements to the purchase team who can then place orders correctly for the various departments.

ALSO READ: Influence and Importance of ERP System in Different Industries

Let’s say the marketing team needs to purchase some office supplies; they have to fill out a purchase requisition form detailing their needs and send it to the purchase department.

Merely telling the purchase department what they need does not help in reducing fraud as there is no paper trail and it leaves space for deniability.

Purchase requisition form allow companies to validate purchases, and based on these forms, the purchase department triggers the procurement purchases till the marketing department gets the supplies they need.

The purchase department has to act on the requisition forms they receive.

They can approve, deny or change the requests made by different departments.

Rejections must be accompanied by reasons so that the department can make necessary changes.

ALSO READ: Debit Note vs Credit Note

Importance of Purchase Requisitions in the Purchase Process

1. They Initiate the Process

When departments submit a requisition form to the purchase department, it initiates the entire process.

The purchase department generates a PO based on this form.

In case of any problems, this form becomes important evidence to check facts and affords better protection of organizational assets.

It is followed and acted upon, and thus creates a paper trail.

2. Effective Control Tool

Without checks and procedures, staff may commit fraud – order materials not required and pocket them, for instance.

However, with a formal written request, the possibilities of fraud are minimized as the request has to go through several people for validating it.

All the scrutiny before approval ensures that it is a valid purchase.

You could say that it’s a formal method of issuing a purchase notice, with evidence that a department requested a purchase.

The responsibility for that expenditure will be transferred to the purchase department from the requesting department.

ALSO READ: Vendor Managed Inventory and What are its Benefits

3. Helps Save Costs

By centralizing purchases, a business can save time and money; you can see at a glance what you’re buying, how much you’re buying, and at what cost.

As purchase managers receive several requisitions, they can bundle orders and use this as buying power leverage.

This can help you negotiate better with suppliers and get better prices and payment terms.

4. Important Evidence for Audits

As audits require seeing approvals from proper authorities for purchase decisions, purchase requisition forms are ideal.

They contain details of the requesting employee, approvers, and materials that were requested.

5. Helps Avoid Duplicate Orders

With a whole department just to handle purchases, companies can use purchase requisition forms to track all requests and ensure that no duplicate requests are there.

This way, accidental multiple orders for the same item can be identified and eliminated.

ALSO READ: Cost Reduction Strategies in Procurement and Supply Chain

6. Boosts Accountability and Business Security

Purchase requisition forms are proof that a specific department needed certain products and that they had ordered them.

After matching the delivered goods with the requisition, a paper trail is created from the time of requisition till they are ordered.

This assigns accountability to all individuals involved in the process from start to finish and increases security for the organization.

In the event any fraud or mistake is detected at a later stage, none of the employees involved can deny their role as their details are recorded, and they can be asked for an explanation.

ALSO READ: What is Cross Docking?

Final Thoughts

Though it is a simple document, a purchase requisition form is a critical tool of spend control, especially for medium and large organizations where there are numerous departments and thousands of items that are used and required to be purchased frequently.

It is essential to authorize purchases for an organization and can be used to prevent fraud.

However, if you have to fill out a form manually every time someone in the company needs to purchase something, it can still lead to errors, and take up precious time of your employees.

The wise thing to do would be to implement robust business software like Tranquil to automate repetitive and cumbersome tasks and streamline your workflows.

Leverage the feature-rich procurement module to keep the cost of procurement low, while always having adequate stocks to operate your business.

If you’re not sure how this works, do schedule a free demo at your convenience, and we will walk you through our software. Our team will be happy to answer any queries you have.

Every business needs finances to operate – buying raw materials or products, paying wages, rent, insurance, utilities, repairs, and so on.

The cash required for these activities is called working capital.

A small business that is on a growth trajectory will especially be in need of funds quickly for their expansion.

Wholesale business is usually conducted on a credit basis, where the purchaser is given a specific period – usually 30 days – to pay the amount.

A growing business may find it difficult, however, to wait for so long to get paid.

This is where reverse factoring comes in.

ALSO READ: Benefits of ERP in Accounting and Financial Management

What is Reverse Factoring?

Reverse factoring is also referred to as supplier finance or supply chain finance, and is a fintech solution that helps in mitigating the adverse impacts of prolonged payment terms.

It can help both vendors and buyers in optimizing their working capital.

This methodology connects financial institutions, vendors, and buyers, and helps to enhance cash flow, decreases risks in the supply chain, and offers predictable ROI for those supplying the funds.

We could say that it’s a type of supplier financing solution.

ALSO READ: Benefits of Bank Reconciliation in Accounting 

Businesses can utilize reverse factoring and make payments earlier than the due date on specific invoices.

Vendors who participate in reverse factoring usually request the financial institution in question to make early payments against specific invoices, and the buyer makes payments on the maturity or due date to the bank or financier.

By facilitating vendor access to reverse factoring, buyers can lower the risk of disrupting their supply chain, and improve relationships with vendors, while bettering their working capital posture.

Reverse factoring programs may be offered either by one single bank or by platforms which facilitate several different financial institutions to offer funds.

A crucial thing to consider when implementing a reverse factoring program is reverse factoring accounting, or how you will treat it in accounting.

Businesses need to ensure that it is categorized not as a bank debt but a solution that is not included in the balance sheet.

How Does Reverse Factoring Work?

The reverse factoring process involves several steps which we mention below:

• Company buys goods or services from a vendor
• Vendor uploads the invoice on the reverse factoring platform mentioning the due date a few days or months into the future
• The invoice is approved by the buying company
• The vendor requests early payment against the invoice
• A financier pays the vendor the amount, deducting a small amount as fee
• On the due date, the company makes payment to the financier

ALSO READ: Ways To Do Budget Variance Analysis

What is The Importance of Reverse Factoring?

Let’s face it, it’s a consumer’s world; especially in the corporate sector.

The buyer decides on payment conditions.

On the other hand, vendors are not willing to wait for ages to get money, since they have huge capital expenditures and working capital investments.

Moreover, they understand the tremendous opportunity for revenue and growth they have when they receive purchase orders from large corporations.

By entering into reverse factoring procedures, they can get their payments immediately instead of waiting for the maturity date of the invoice.

If we check the history, reverse factoring began in the automotive industry, as it enabled companies to operate more effectively with their suppliers, which were relatively small companies.

However, the reverse factoring market size is still small when compared to say, the factoring market.

ALSO READ: What is a Ledger in Accounting? Types and Formats of Ledger

Requirements for Reverse Factoring

Businesses seeking reverse factoring may be required to submit the following documents, though the requirements could differ for individual companies:

• Comprehensive business plans
• Credit reports
• Financial statements after auditing
• Finance forecasts
• Directors’ names and details
• A detailed list of assets and liabilities

Now that we have seen what the term means and why it’s important, let us see what the benefits of reverse factoring are. Both vendors and buyers benefit from this technique.

ALSO READ: ERP vs CRM: Key Differences and Benefits 

Benefits for Vendors

• Funding at Reduced Cost – the buyer’s credit rating is considered, and these are usually big, established companies with better ratings, and hence the financial institutions charge lower interest for funding
• Enhance Working Capital – vendors can fast-track their cash flow and improve their working capital posture by decreasing their DSO or days sales outstanding.
• Spur Innovation – when they get quick payment against their invoices, vendors may be motivated to invest in research and development activities and engage in business expansion.
• Better Forecasting of Cash – vendors can benefit from being sure about when they will receive future payments. They will be able to effectively forecast their cash flows and make sure that they base their decisions on reliable data.

ALSO READ: What is Asset Depreciation?

Benefits for Buyers

• Better Working Capital – with reverse factoring, buyers can also improve their working capital as they can extend their DPO or days payables outstanding.
• Mitigate Supply Chain Disruption Risk – when vendors get cash early, they can reinvest it in production or bulk purchases quickly, and fulfil the demands of buyers
• Forge Better Bonds with Vendors – suppliers will be happy to get money early; so, by introducing a program that makes it possible to receive payments early will help in strengthening their relationships with those vendors.
• Stronger Negotiating Position – buyers who offer reverse factoring to their vendors may get a stronger case to negotiate better terms of purchase with them.

ALSO READ: What is a POS System?

Who Uses Reverse Factoring?

This financing method is usually offered to those vendors with whom a business has been trading for a long time, and are therefore trustworthy.

You are not likely to offer this facility to a vendor with whom you are working for the first time.

It also takes some time to include a vendor into the reverse factoring system of any company.

This is a method that is normally employed by large businesses that is looking to make their cash flow situation better.

They need some time to convince a bank or financial company to get involved in this arrangement; the financiers are more likely to agree to extend this facility to large companies, as they have good credit ratings.

Small companies are generally not offered this facility.

Experts feel that reverse factoring facilities should not be offered to more than 50 vendors for a variety of factors; a huge reason being the intense administrative effort that will be needed for onboarding vendors into the system.

That, however, was the conventional viewpoint.

ALSO READ: How ERP Can Improve Business Efficiency?

Today, with robust software like Tranquil, companies can easily offer this facility to all their vendors.

This could be hundreds, thousands, or even tens of thousands of them when we talk about large corporations.

As small businesses who supply products to large businesses often find it nearly impossible to get funding at economical rates, offering all vendors reverse factoring can exponentially increase the benefits offered by this method.

For any reverse factoring system to succeed, it is essential that vendors are onboarded quickly and smoothly.

If the onboarding process is hassle-free, more and more entities will adopt it.

This process can be utilized by businesses in any industry; they just need to ensure that the purchasing company has a strong credit rating and that there is a robust relationship between the buyer and vendor.

It is usually seen in these industries:

• Clothing
• Automotive
• Manufacturing
• Aerospace
• Electronics

Reverse Factoring Vs Dynamic Discounting

Dynamic discounting is somewhat similar to reverse factoring; however, it’s not the same, and the two should not be confused with each other.

Dynamic discounting is another financing solution that allows buyers to make an early payment offer to the supplier.

However, here, the funding comes from the buyer and not a financial institution or bank.

In Dynamic discounting, the buyer negotiates for a discount for making early payments against their invoices.

Here the buyer uses their own cash to support supplier, get risk-free returns, and mitigate supply chain disruption risks.

ALSO READ: Complete Guide on Make to Order vs Make to Stock

What is the Difference Between Traditional Factoring and Reverse Factoring?

Factoring and reverse factoring are two different methods of financing.

Factoring is a method of receivables financing, where a business discounts its invoices and sells them to a factor.

The customers of that company then make payment against those invoices to the factor or factoring company.

In reverse factoring, it is the buyer who initiates the program, and not the vendor.

Therefore, the financial institution charges an interest rate after taking into consideration the credit rating of the buyer rather than the vendor.

Usually, this leads to funding at a lesser cost than what the vendor could have hoped to get.

ALSO READ: Influence and Importance of ERP System in Different Industries

There are a few differences in the two methods.

Let’s check them out:

• Factoring is requested by the supplier; they offer discounts on early payment of invoice. Reverse factoring is initiated by the buyer.
• Factoring is considered as debtor finance while reverse factoring does not qualify to be so considered.
• In factoring, suppliers sell their accounts receivables to an external factor at a discount, so that they get paid quickly, and the factor also gets to make a profit, as they collect the entire amount from the purchaser.

Vendors are willing to use factoring as it enables them to infuse cash into their business immediately – even if they get a slightly lesser amount.

The factor faces a slight risk as they have to collect the amount from the buyer of goods on the due date.

Usually, factors agree to deals only if they are confident that the buyer will pay for sure.

In essence, both methods help businesses in the supply chain get paid earlier and improve their working capital situation.

ALSO READ: On-Premise or Cloud Database Hosting: What’s Right for You?

Final Thoughts

While reverse funding is an ideal strategy for supply chains in numerous instances and offers benefits for all stakeholders like financiers, buyers, and vendors, it is still used quite rarely.

Most businesses find it easy to quickly sell off their invoices to third-party factors at discounts.

Reverse funding is a great method for companies that have a requirement for funds to be received in ten days; it is expected that the popularity of reverse factoring is set to increase in the near future, thanks to its numerous benefits.

Banks will be able to generate additional revenue streams if they make a stronger push for this financing method.

Tranquil ERP has a feature-packed finance module that can help you with factoring accounting, reverse factoring, or any other accounting process you may require.

It also provides other modules that help you run your business more efficiently and increase productivity.

If you have not yet implemented a cloud-based, scalable, flexible, secure, and affordable ERP, it’s time to switch to Tranquil Cloud ERP. But don’t just take our word for it – allow us to show you how we can help your business. Do schedule a free demo at a time of your convenience, and we will be happy to walk you through it and show you how it works. Our representatives will be available to answer all your queries regarding our software.

 

No, we’re not talking about the age of your customers and suppliers in years.

Supplier aging is also known as accounts payable aging, and customer aging is also called accounts receivable aging.

Let’s clear the air and understand what both these terms mean and what their importance is in accounting.

ALSO READ: Tips to Improve Inventory Turnover 

What Is Meant by Customer Aging?

Accounts receivable or customer aging refers to the period of time an invoice hasn’t been paid by a customer.

This often reflects the state of the company’s finances and dependability of their customers.

The customer aging report is prepared periodically to assess how much money the business is owed by its customers.

You can see how quickly or slowly you are able to collect money from your customers.

If it is too slow, it could signal a higher credit risk in sales, or that the business itself is slumping.

ALSO READ: Importance of Cash Book in Accounting

How Does it Work?

Customer aging is a management technique that identifies high-risk customers, enabling management to take a call about continuing to sell to those customers who are perpetually late with payments.

The customer aging report contains columns, normally broken into month-long date ranges, showing the total amount due at present, and the dues for every month.

Some businesses may follow a strict 30-day period as well.

Whenever a customer makes a payment against an outstanding invoice, whether current or past due, you must reduce the accounts receivable against that customer by that much amount.

So, if a customer owes you SAR 2500 and it is past due for about 40 days, and he pays you the full amount, you must ensure that that column is now brought to 0.

ALSO READ: What is a Ledger in Accounting? 

Doubtful Accounts

Customer aging reports are valuable in deciding what to do about doubtful accounts.

When you are preparing the financial statements, you need to estimate how much bad debt should be mentioned.

The customer aging report helps in determining the write-off amount.

The most valuable aspect is getting the aggregate of accounts receivables, depending on how long the invoice has been unpaid in days or months.

If invoices remain unpaid for over six months, the possibility of collecting on them become very slim – unless you take legal recourse.

Each date range is assigned fixed default percentage, with invoice unpaid for long time periods being assigned higher percentage due to the higher risk of default, and reduced chances of collection.

The total of products from every data range offers an idea of how much uncollectible receivables is there in total.

ALSO READ: How to Understand and Manage VAT for Your Business?

Benefits of Customer Aging Report

The customer aging report helps a business in numerous ways.

Accounts receivables is basically credit that is extended to customers.

The aging report shows the customers who are consistently paying late, and this can help management take a decision whether to extend further credit or do business only on a cash basis with these customers.

They are helpful in writing off bad debts; we saw earlier how the total amount of accounts receivables helps accountants determine who much bad debt is to be shown in the company’s book of accounts and on the financial statements.

By tracking unpaid invoices, the business can identify the number of accounts they will be unable to collect from, and also evaluate cash flow problems and potential credit risks.

ALSO READ: Debit Note vs Credit Note

The customer aging report also forms the base for generating letters for collection to customers with long outstanding balances.

Businesses usually send copies of the report to customers together with a collection letter or month-end statement that mentions details of outstanding invoices.

This means that accounts receivables aging report is used both internally and externally.

Calculating Customer Aging

The unpaid accounts are listed in chronological order of their payment status.

There are different slots like current, less than 30 days, 60 days, etc.

Depending on how many accounts are aged over 180 days, a business can get an approximate figure of outstanding accounts receivables to be written off in the future.

ALSO READ: Ways To Do Budget Variance Analysis

Importance of Customer Aging

While customer aging reports offer several benefits, there are two main reasons why a business keeps track of them:

• To have a clear record of overdue accounts which will help the business to follow up on old debts; these can then be written off, followed up legally, or sold to collection agencies.
• To have a proper understanding of how many accounts the business can expect to not collect on. The company uses the allowance method to figure out these estimates, which are included in the financial statements as expected losses.

ALSO READ: What is Asset Depreciation?

Supplier Aging

Businesses almost always purchase goods for sale or raw materials for production on credit.

Companies that deal in a large number of products may find it overwhelming to keep track of how much they owe to different suppliers.

A supplier aging or accounts payable aging report can be of great help in such cases.

What is a Supplier Aging Report?

To understand this, it is essential to first get a clear and complete understanding on what accounts payable is.

To put it simply, accounts payable is the money you owe to your suppliers; the debts you owe them for the purchase of services, inventory, raw materials, and anything else, for operating your business.

Your accounts payable increases every time you make a credit purchase.

The seller or supplier generates an invoice in your name and you pay them at a later date.

Ergo, a supplier aging report lists the amounts you owe to other providers and have not paid.

It helps you see at a glance how much you have to pay, and to organize these amounts.

ALSO READ: Guide on Inventory Demand Forecasting 

Supplier aging reports include the following:

• Name and contact details of the supplier
• The amount owed to individual suppliers
• The age of the unpaid invoice or the length of time you owe the debt
• Payments that are past due

A detailed supplier aging report offers an uncomplicated method of tracking and managing your accounts payable, allowing you to make timely payments, and eliminating late fees of other penalties, legal actions by your vendors, and the loss of reputation in the market.

Benefits of Supplier Aging Report

The accounts payable report helps you in:

• Managing your cash flow
• Deciding on the priority of the order in which to pay your debts
• Planning business budget and future expenditure
• Detecting issues in accounts
• Ensuring that you don’t miss payments and helps you make timely payments
• Negotiating the terms of payment of invoices

ALSO READ: Tips to Increase Gross Margin Return on Investment (GMROI)

Components Of the Supplier Aging Report

The supplier aging report contains columns that help in categorizing your suppliers, the invoice age, names of you suppliers, the amounts you owe them, and so on.

There is a separate row for each vendor which mentions the total amount you owe them, and, if applicable, the amount that is past due.

The supplier aging schedule contains columns that classify your debt depending on the invoice age.

Every column refers to a specific period of time after receipt of the invoice – usually that time period is 30 days.

ALSO READ: What is Job Costing?

So you may have columns like:

• Less than 30 days old or current (not past due yet)
• Less than 30 days past due (after the first 30 days from the invoice date)
• More than 31 and less than 60 days past due
• More than 61 and less than 90 days past due
• More than 91 and less than 180 days past due
• Over 180 days past due

So as long as you pay within the first 30 days of the issue of the invoice, it is not past due; it is from the 31st day after the invoice date that your past due days are counted.

If the invoice is not paid within the first 30 days, it becomes past due. And depending on how long you have not paid the invoice, it is put into one of the columns.

For example, if you have received an invoice on March 1st, then you have 30 days to pay, so you must pay on 31st. On the 1st of April, it becomes one day past due.

The supplier aging report maintains a running balance on the amount owed to various suppliers.

ALSO READ: Ways to Improve the Procurement Process

Every time you purchase goods and services on credit, your accounts payables increase; when you continue to buy from the same vendor on credit, you could end up owing one supplier for numerous transactions.

The report helps you see which payments are already past due, and you can make a decision regarding which debts to pay off first.

Every time you pay off an invoice, either current or past due, that amount is to be deducted from the respective column in your supplier aging report.

Suppose you pay SAR 5000 to a vendor to whom you owe SAR 7000, and the invoice amount was in the ‘more than 31 and less than 60 days’ past due column, you should delete that amount and ensure that the column against that vendor’s name reflects the new balance of SAR 2000.

When you use the accounting software from Tranquil, it will automatically update the balance in the accounts payable aging report by deducting the amounts paid.

ALSO READ: Challenges in Procurement and Supply Chain

Things to remember about a Supplier Aging Report

You can ensure that your report is accurate and valuable by considering these:

• Include vendor terms to avoid late payments; most vendors allow 30 days for payments after which invoices become past due, but the terms can differ
• Update your supplier aging report regularly, and remove amounts that you pay, or else you will not get a true picture of the amounts you owe your vendors.

Customer Aging Vs Supplier Aging

We have seen what customer aging is and how it impacts the business, and what supplier aging is, and the effect it can have as well.

Both reports help businesses to handle their cash flow better and plan for future expenses and budgets more effectively.

Let us now take an in-depth look at the difference between an accounts payable aging report and an accounts receivable aging report.

We will refer to customer aging as AR and supplier aging as AP, for short.

One thing is very clear. They are both the opposites of each other.

• AR aging report shows you how much money your customers owe you, while AP report shows you how much you owe your vendors.
• AR aging report helps you decide whether to extend further credit to a late-paying customer; AP report helps you make timely payments and avoid fines
• AR aging report helps you determine how much to write off as bad debts, while the AP report helps you to negotiate for better terms of payment

ALSO READ: Vital Procurement KPIs You Cannot Ignore

You can create supplier and customer aging reports manually or be smart and leverage automation. Tranquil ERP is an efficient solution with a robust finance and accounting module that helps you keep track of your accounts payables and receivables, and eventually, save money and time.

For more details of how it can benefit your business, schedule a free demo now!

 

Inventory is one of the most critical assets for any business that manufactures or sells products.

But managing inventory effectively can be extremely complex.

Today we look at SKUs and their role in inventory management.

Do we have too many SKUs?

Many retailers ask this question to themselves, as they struggle to manage their inventory efficiently and try to keep costs down.

While you do need a good number of SKUs to make sure there is availability and variety of products, it also signifies that your business and logistics provider have to keep track of that many SKUs.

If you ever get the feeling that you have way too many SKUs, and it’s becoming overpowering, then it’s time for SKU rationalization to optimize your inventory.

Let’s first get a clear understanding of what SKUs are before we start discussing the rationalization process, strategies, and benefits.

ALSO READ:  Inventory Reduction Strategies

What are SKUs?

A Stock Keeping Unit or SKU is a system of inventory management where you allocate a distinct alphanumeric bar code to a product’s variants.

Let’s take the example of a clothes retailer.

A polo neck T-shirt is likely to be available in a range of sizes and colors; this means separate SKUs for every variant combination.

Like, T-shirt size M color blue, size M color red, size XL color blue – you get the drift.

One product can produce even 50 separate SKUs.

However, maybe a certain color is not selling as well as the others, or some sizes are slow selling; the seller has to make a decision here.

ALSO READ: Guide on Stock Adjustment and Stock Transfer

SKUs are retailer-specific, and help in inventory management; they are unlike UPC or EAN barcodes which are universal.

These SKU codes help customers to differentiate between similar products, and in that sense, they are highly valuable to businesses.

However, too many of them means there are too many vendors, people, data, storage space, analysis, and so on.

Simplifying operations in your business is a major requirement for the efficient functioning of your business and is also critical in supply chain management.

SKU rationalization is one method you can use to achieve this objective.

SKU Rationalization

In the simplest terms, SKU rationalization is the process of deciding which products to discontinue and which to maintain, to reduce the number of items and simplify business operations.

You can eliminate nonessential carrying costs and reduce other production expenses too.

This process can significantly alter the manner in which your business operates.

Therefore, you should approach this thoughtfully, and do it in a phased manner.

If you follow the proper guidelines, you should be able to reduce your SKUs smoothly and seamlessly.

When managing inventory for a product, it’s up to the merchant to decide how many SKUs they choose to have available for that item, and the quantity of each.

For example, an apparel brand selling a particular style of a t-shirt might choose to stock seven of the ten available colors offered by the supplier.

ALSO READ: What is Inventory Reorder Point(ROP)?

To use the proper definition of SKU rationalization, it is the process by which traders can measure how profitable the products they stock in their inventory are.

With the use of performance indicators like supplier fees, storage costs, carrying costs, etc. combined with sales data, retailers can take decisions regarding items that need to be discontinued or continued but with certain adjustments.

Businesses can determine if any of the SKUs are hampering or improving their business, and take requisite action to streamline their inventory and reduce costs of operations.

Any business can enjoy the benefits of regular SKU rationalization; however, it is especially critical in the case of those categories of products that have specific products with seasonal demand and are subject to high turnovers.

Examples of such products include clothes; like jackets and warm clothing will only be in demand in the colder months.

SKU Proliferation

SKU proliferation is the opposite of SKU rationalization; here a seller adds more SKUs to their stock to be able to fulfil consumer demand.

This strategy is gaining popularity due to the sharp growth of E-commerce because sellers want to tap into more markets and attract as many new shoppers as they can.

Logically, more SKUs mean more variety and choice for shoppers; it also indicates having a competitive edge in the market.

ALSO READ: What is Order Up to Level in Inventory Management? 

Why is SKU Rationalization Important?

Of course, this means that you will incur more expenses in the form of labor, carrying costs and so on, and also require additional storage space, and you will also tie up more of your capital in inventory.

Your data analysis will be more complex and intensive.

All of these can be overwhelming and challenging not only for you but also for your third-party logistics service provider.

To put it succinctly, increasing your SKU counts can be expensive and draining for your business.

Benefits of SKU Rationalization

1. Reducing Storage and Supplier Costs

Storage charges, labor cost, insurance, etc. are all part of the carrying cost of inventory, and it makes up for over 30% of inventory cost on average.

After all, once you purchase products, you have to store them well and care for them till they are not just sold but packed and shipped out.

By analyzing historical sales data, you can get a good idea of how much quantity of an SKU to order, and the time to reorder it.

With an automated inventory tracking system, you can get all the data and analytics you need for calculating the turnover rate of your inventory; this metric tells you the number of times a particular inventory item is sold and replaced within a specific time period.

Tranquil simplifies monitoring costs like storage, fulfilment, and so on across your network by monitoring inventory activity – like what products are entering and leaving the inventory – in real-time, with a central and intuitive dashboard.

ALSO READ:  Cost Reduction Strategies in Procurement 

2. Better Inventory Accuracy

Tracking the stock in hand is not the only facet of inventory management; decisions have to be made regarding individual SKUs about reorder levels and times, and more.

Tranquil inventory management software tracks performance of SKUs over specific periods and delivers important KPIs like demand forecasting, SKU velocity, inventory turnover rate, etc.

With Tranquil, you can easily track SKUs, enabling you to see, administer, and alter SKUs whenever you want.

It also facilitates the bundling of products so that you can sell of slow-moving SKUs with hot-selling ones.

3. Enhances Profitability

Inventory is an asset on the balance sheet of any business, and costs incurred in carrying unsold inventory is considered working capital.

This is, assuming that the goods will be sold for a profit by the end of the accounting period or financial year.

However, we know that stocks can experience loss in value, and sales can suddenly dip.

When this happens, unsold items become dead stock and are usually written off.

While this is beneficial in the short term, too much working capital invested in obsolete inventory can negatively impact you in the long term.

ALSO READ: What Is Gross Margin Return on Investment (GMROI)?

SKU Rationalization Process

Here are the steps to follow:

1. Think About your Target Market

This is the golden rule in business.

You need to consider your target audience, your buyer persona – and the USPs, or the selling point or value proposition you’re offering this audience.

Your products need to be aligned with this value proposition so that you can create offerings your customers are most likely to be interested in.

In other words, your products should be able to resolve some of the pain points of the target audience or be something they really love.

Check your SKUs against these two factors.

Those that are not selling well, may not be resolving their pain points or be a popular item in that audience.

Make a list of such products from which you can finalize which SKUs you actually want to remove from your stocks.

ALSO READ: Detailed Guide on Budget Variance Analysis

2. Analyze your SKUs in Detail

With regular tracking of sales data, you will have a clear picture regarding the high-performing SKUs, and which ones give you excellent ROI, after factoring in cost of inventory and suppliers.

In spite of this, you must also consider the scenarios like volatile customer demand, poor turnover of inventory, high rates of return, high need for storage, intense labor requirements, and prolonged lead times.

By studying these factors, you will be able to understand how all an SKU can hamper your business.

If a particular SKU exhibits two or more of the features just mentioned, you need to think of discontinuing that SKU; if it’s just one, you may want to think of how you can resolve this problem and manage your inventory more efficiently.

3. Consider other Impacting Variables

After performing your SKU rationalization analysis, you must think of variables capable of impacting the profitability of an SKU.

If you compare your market activities and sales, you will be able to see if any specific offers caused a sharp increase in the sale of a specific SKU.

But in case you’ve launched a product that competes with an existing item, you may experience a dip in the sales of the older product.

This product cannibalization is why you need to exercise caution during SKU proliferation.

Check what your rivals are doing; have they launched new products that have caused dips in your sales?

ALSO READ: Why Use a Barcode For Tracking Inventory And Assets?

4. Organize your Product Catalog

You can create separate categories of SKUs and sort each SKU into a specific category for easy review.

Like, the categories could be Continue, Remove, Adjust/Review (if you’re unsure).

This way you will have more clarity, and minimize errors.

ALSO READ: Guide to Avoiding Understocking and Overstocking

5. Review Results

Once you complete your new catalog after SKU rationalization, you must measure the results of the process, and check to ascertain if you have reduced dead stock and operational cost.

In case you have achieved this without impacting your bottom line, this means you have succeeded in inventory optimization.

Ideally, this audit should be performed once in six months to keep your inventory lean, while giving you ample time to gather data for actionable insights.

So now you can understand how rationalizing your SKUs can optimize your inventory and help you manage it better. Automation can take the guesswork out of the equation, streamline your inventory management, and help you be more efficient and productive. Schedule a demo to see how it works, at a convenient time for you.

 

Almost anything you buy today has barcodes – from apples in the supermarket to the latest Smartphones, you can find them everywhere.

In fact, they have become so commonplace that we have almost stopped noticing them.

Barcodes were invented over 7 decades ago, and today they are important tools for any business.

They help in bringing greater efficiency to inventory control and sales operations and can keep track of product movement across the supply chain.

What Is a Barcode?

To put it simply, a barcode is a rectangle containing upright black lines of differing thickness, numbers, and white space, which combine and identify products and their details.

Scanners in computers, mobile devices, and standalone scanning devices are capable of using the unique bar–space–number combination to extract the product data.

As scanners (both handheld and checkout station ones) can read them and instantly retrieve information, they can save time and money, as it eliminates the need for a manual search for getting product information.

ALSO READ: Inventory Management Trends to Watch Out for

1 Dimensional and 2 Dimensional are the two main types of barcodes.

The former is found on groceries that one buys, and the second is generally seen on ads or some products, and it takes the user to the company website.

1-D or linear barcodes are the most popular and can be easily read by most scanners.

Universal Product Code in the US and European Article Numbers in Europe are the most commonly used linear barcodes.

How Do Barcodes Work?

0 and 1 are represented by the width of the black bars, and their sequence signifies a number between 0 and 9.

The scanner’s processor or the computer connected to it contains information on what product is mapped to each unique bar and space combination; it performs some mathematical operations to identify the right item and displays it on the screen.

In warehouses, barcodes may encode product features like color, size, location, etc. so that the company gets inventory details and fulfill orders or physically count inventory quickly.

In a retail store, the barcode may contain the name and price of an item an employee needs to ring up a customer.

Barcodes can be used by organizations to track products across their life cycles – from production to distribution, buying, maintenance, and repair.

ALSO READ: Advantages of ABC Analysis in Inventory Management

Barcode Elements

Barcodes have a uniform design to enable scanners to read them and send the coded information to a computer.

Through different elements, a barcode may contain information regarding manufacturer, product category, origin country, and so on.

The different elements are the check digits, stop character, quiet zones (white spaces), start characters, data, and so on.

Types of Barcodes

1. Linear Barcodes

Black upright lines with numbers below – these linear barcodes are the ones we see most often, they contain letters, numbers, and symbols, each mapping to product attributes.

To function correctly, a 1-D barcode should be linked to a database.

These codes are used on books, consumer goods, shipping labels, and loyalty cards.

ALSO READ: Future of Enterprise Resource Planning

2. Matrix Barcode

These are 2D or QR codes and are capable of storing more information like website URLs, quantity, images, etc., and do not need to be linked to a database to reveal this information.

QR codes often direct users to the product website.

QR codes for inventory tracking are being increasingly used where meticulous tracking of products or components is necessary, like pharmaceuticals and medical equipment.

3. Data Matrix

This type of 2D barcode is capable of storing files and have the exceptional capability to check errors.

It is robust and can be read even if damaged, so often used on appliance electric rating plates, circuit boards, surgical tools, etc.

ALSO READ: Guide on Zero Inventory

Differences

1D barcodes have lines in one direction while 2D can have both, and also other shapes – allowing them to contain up to 2000 characters, against 80 in 1D barcodes.

2D barcodes also necessitate sophisticated scanners or smartphones; they can also be small in size, making them perfect for small items.

Benefits of Barcodes

As they give a quick and unambiguous ROI, barcodes are very popular.

They offer benefits like:

1. Accuracy

By eliminating manual data entry, you can achieve more accuracy in product information.

Barcode errors are almost nonexistent

ALSO READ: Why is Cycle Stock Important for Your Business?

2. Real-time Information

Whenever a barcode is scanned, the inventory and sales figures in the company’s systems are instantly updated, offering real-time, updated data to businesses.

This helps in calculating valuable KPIs that offer insights into the inventory and sales performance.

3. Less Training

Employees don’t need much training as barcodes are self-explanatory, and reduce need for memorizing.

Even without knowing product codes, employees can be productive.

ALSO READ: The Ultimate Guide to Dropshipping

4. Inventory Control

Companies can avoid spending excessively on products and improve their inventory management.

Employees have access to updated inventory data which empowers them to make informed decisions regarding purchases and discount offers, which eventually help in reducing inventory holding costs and avoiding dead stocks – translating into long-term profitability.

5. Reduce Costs

The initial financial outlay is not as huge as for other similar systems, but this system offers immense value.

Small companies can start small with just a few barcodes for internal use and can increase the number as they grow, without incurring huge cost.

ALSO READ: What is Product Bundling in Inventory Management?

Uses of Barcodes

1. Inventory Tracking

Businesses have to know current stock levels and where they are located at any given time.

Warehouse employees or mounted automated scanners scan new products 1) when they come in, and 2) when they are shipped out.

Every SKU has a barcode linked to a database with the requisite product data.

Thus, barcodes being scanned when products come in and go out helps in inventory management.

2. Asset Tracking

Businesses use QR code for asset management, for tracking assets used to support their everyday operations – vehicles, equipment, computers, etc.

When combined with asset tracking software, barcodes enable businesses to track the asset status and location, storing important information regarding repairs and maintenance, as such assets are held by companies for years and used for prolonged periods.

Barcodes for mobile items like vehicles and computers may also show details of last usage.

This helps management understand the condition and usage of various assets, to plan for the future.

ALSO READ: What is Asset Depreciation and Why is it Important?

3. Invoicing

Invoices with barcodes become easy for tracking accounts payable and receivable, and to also link them to specific customers.

Scanning the barcode at payment receipt can ensure that the correct account is credited, and so on – this can also speed up the fulfilment process.

With invoice printouts, warehouse workers can simply scan the code to see which items to pick from where, eliminating errors, and can scan barcodes of items after picking to ensure all items are as per the order.

ALSO READ: What are the Benefits of e-invoicing for your Business?

4. Mail

Companies can also use barcodes to track packages and documents sent by mail by just scanning all packages before sending them to the courier companies.

This links tracking data to the order which can be sent to customers to check order status.

5. Mail Merges

Mail merge is the linking of a spreadsheet or similar data source with other documents to populate the data automatically in the predefined fields.

Companies use mail merges to generate barcodes for specific item batches easily – and is more efficient than manual handling.

What is Barcode Asset Tracking?

It is a simple and economical method for businesses to manage and monitor their physical assets.

Barcode labels and readers make it possible to perform lifecycle management of assets and for inventory control.

Every organization needs physical space, land, appliances, furniture, office supplies, computers, and accessories to function; manufacturers and other businesses may need heavy machinery and other equipment.

All these are assets, needed for effective functioning, revenue generation, or for maintaining operations.

The tangible, durable equipment or properties used by organizations in their operations for revenue generation, are called fixed assets.

ALSO READ: ERP software in Warehouse & Fixed Asset Management

Their value depreciates as they are used, and this has to be recorded in the company’s books of accounts.

Without that, it is not possible to know what the fixed assets the company owns, their location, and their status.

This kind of neglect can cause assets to be misused, damaged, stolen, or lost, leading to heavy expenses, taxation mistakes, frustrations, and waste of time.

With QR code equipment tracking or barcode asset tracking, you can allocate unique barcodes to every fixed asset.

When it’s scanned, it will reveal the chief properties of the asset, its location, and any other important information the company wants.

Along with asset tracking software, barcodes can connect users with information like its entire history of maintenance, depreciation, maintenance schedules, relevant photos, or any other relevant records.

ALSO READ: What is a Ledger in Accounting?

Keep Track of IT Assets with Barcoding

Tracking IT assets is critical because most companies today invest huge money in them.

Failing to track those assets can cause a serious dent in the bottom line.

IT asset tracking offers several important benefits – mainly, transparency in your efforts of IT asset management.

It helps in recognizing and eliminating flawed IT assets, say those that have frequent problems, leading to workflow disruptions and downtimes.

It also affords greater visibility into IT assets, enabling management to prevent duplicate purchasing and identifying idle assets, reassigning them to teams that need those assets instead.

ALSO READ: What are Backorders and How to Manage or Avoid Them?

A platform for IT asset tracking helps businesses to stay updated with their records when they remove certain assets.

Precise maintenance of records eliminates ghost assets and companies can avoid paying insurance for assets no longer in their inventory.

You can also configure notifications to make sure that the correct procedures are followed for the disposal or retirement of fixed assets.

Customized alerts allow IT managers to stay on top of routine services, updates, and maintenance to ensure maximum uptime and efficiency, and minimal risk from cyber security threats.

The Benefits of Tracking Assets with Barcodes

QR code asset tracking offers multiple benefits:

• Improved accuracy of inventory management
• Fast data collection
• Reduced cost of asset tracking
• Fewer errors
• Easier maintenance of records
• Easy rollout with short learning curve for employees
• Real-time location updates
• Information on maintenance schedules
• Captures and stores a lot of information for every asset
• Better data integrity
• More accountability
• Lower cost of labor
• Save time

Modern organizations realize that barcode asset tracking is critical for success, and not merely for accounting and compliance purposes.

While earlier, organizations had to depend on expensive handheld scanners for the purpose, today QR codes and barcodes can be scanned by Smartphones and tablets, which can be used for various other purposes too.

You simply need to have a robust asset-tracking software solution installed.

Tranquil asset management software is a robust solution that can help you do all this and more. Schedule your free demo now to know more! We are happy to explain how it works.

The success of a company depends to a great extent on how well it recruits, inducts, manages, and rewards its employees.

You cannot afford to do guesswork here; if you leverage the power of data, you can get all of it right, and be successful.

You can be proactive and organize programs for career development, and compare total remuneration metrics against the cost of bringing new employees in the place of top-performing ones.

Employee turnover refers to the number of employees quitting a company in a specific time period.

Usually, this is a one-year period.

It can be measured pan-organization or department-wide – and even demographics-wise; like males or females, which age groups, which designations etc.

ALSO READ: Benefits of Having an Employee Self-Service System

Calculating Employee Turnover

Computing the employee turnover rate may sound simple, but there are multiple factors that can tilt the scales.

The HR department should evaluate the rates of attrition and the reasons for the same.

If they are unable to do so, they can consult external human capital management specialists and get insights from them.

According to HR specialists, you need to calculate the turnover rate of employees by dividing the number of employees leaving in a specific period, say a month by the average number employed on the payroll in that same time period, and then multiply the figure by 100.

ALSO READ: Common HR Mistakes and Tips to to Avoid

This means you need:

• Complete headcount including every employee on the payroll, temporary workers, workers laid off for a short period, those on leave, etc. It does not include workers supplied by external agencies or contractors and are on that agency’s payroll.
• Average number of employees per month; divide the total number of employees every month and divide it by the number of months or total headcount from the reports, if you need to measure this more frequently.
• Total separations which comprise both terminations and resignations, but do not include temporary lay-offs, and employees on vacation, etc.

So, we have the formula:

Number of separations / average number of employees x 100 = Employee turnover rate

Therefore, for a company with an average of 250 employees working in a particular month, and 30 employees go, the turnover rate would be 12%, when we follow the formula:

(30/250) x 100 = 12%.

Remember to exclude temporary employees or layoffs on either side of this equation, which can skew your results and give you a higher employee turnover rate than the actual.

ALSO READ: HCM Vs. HRM 

What is the Cost of Employee Turnover?

Replacing skilled employees can be expensive; which is why, businesses implement measures to decrease employee turnover, whether voluntary or not.

The cost of hiring, onboarding, and training a new employee can be nearly double the salary of the existing employee.

If you apply the formula, if you have to replace an employee who earns SAR 100,000 a year, you may have to spend up to SAR 200,000.

Let us continue with the example of turnover ratio.

You have 12% turnover; if the average salary is SAR 80,000, this means you could have to spend up to SAR 160,000 each on the 12 workers you replace per year.

If you’re experiencing high turnover because of wrong hiring and having to terminate the employee almost immediately, it’s a case of financial and productive loss.

It also impacts the employee morale negatively, and affects the quality of work done by others.

Therefore, the cost of employee turnover is not limited to the financial aspect.

ALSO READ: Must-Have HRMS Modules and Features 

Types of Turnover

Employee turnover is mainly of two kinds – voluntary and involuntary.

Voluntary Turnover

It is voluntary turnover refers to the employee choosing to quit; the reasons could be any – better job opportunity elsewhere, dissatisfaction at your company, conflict with coworkers, moving to another city, disability, and so on.

There could also be instances where employees move from one department to another; in this case, there is turnover for a particular department but not for the organization as a whole.

Involuntary Turnover

When employers dismiss an employee for under-par performance, bad attitude, fraudulent activities, or any other reason, it is termed involuntary turnover.

Turnover is completely normal for any business and cannot be eliminated; however, you can keep it low.

Now what constitutes a low turnover depends on the industry, size of the company, region, and type of job.

This means a retail chain cannot compare their turnover ratio with a bank, and so on.

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What Causes Employee Turnover?

Now that we’ve seen what employee turnover is and how to calculate it, let us look at the main reasons for employee turnover:

Industry experts agree that the main reasons for employees moving to other companies are better pay, more holidays, great benefits, prospects of promotion, conducive work atmosphere, and supportive superiors.

Turnover can be stemmed significantly when a company is prepared to hike overall remuneration, be more flexible, ensure their managers are effective and take quick remedial action when they notice above-average attrition in any particular department.

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A company that does not value its employees and care about their wellbeing is a poor paymaster, or does not have a positive work culture and atmosphere, is certainly going to have a higher turnover rate than those companies who do implement these things.

Mind you, however, there is no way you can have zero turnover.

Some attrition is anticipated, and normal. It is when the turnover takes place for the wrong reasons and takes place at an unreasonable rate that is bad.

Let’s take a look at the most common causes of employee turnover:

• Few openings for professional growth or advancement
• Burnout and fatigue
• Internal transfers and promotions
• Dissatisfaction towards management
• Harmful work environment
• Better offer from another company
• Significant life or family event
• Poor life-work balance
• Poor performance at work
• End of contract period
• Misbehavior at work
• Not a team player
• Committing fraud
• Damaging company reputation

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When you understand the reasons for employee turnover, you can take the requisite action to maintain your staff at the levels you need.

Multiple factors impact turnover, and so the benchmark level of turnover depend on those factors.

It is critical that businesses consider industry related as well as individual factors to measure their turnover rate, and evaluate the results to make informed decisions to bring down that rate.

Turnover Rates and Your Business

You cannot look at turnover rates in isolation; you need the context. Certain industries have higher attrition than others – like hospitality, ITES, retail, etc.

A company should compare its results with other businesses in the same industry to get an idea of how many employees churn they have.

If you take the example of retail stores, you’ll find that there are many newcomers, seasonal workers (more help is needed for the busy season), and part-time workers.

But such businesses can also reduce turnover by improving employee satisfaction with say better benefits, working hours, discounts on store products, and so on.

In general, high turnover rates are definitely problematic.

It could either be because of improper hiring, poor culture, bad compensation structure, inadequate benefits, incompetent managers, or any other factor.

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Can you Reduce Employee Turnover?

Yes, it is possible to bring down the employee turnover rates to acceptable levels.

Here are some tips:

1. Define Managerial Responsibilities

Make sure that your managers know what is expected of them to stem employee turnover.

Managers must be able to understand personal motivations and what encourages employees to stay or leave, to be more productive, proactive, loyal, and so on.

It is vital that managers report on these matters regularly and keep top management in the loop regarding the causes of employee churn.

Each employee who leaves is likely to have a completely different set of reasons.

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2. Communicate Openly about Opportunities within the Company

Most employees want to move up and progress, and earn new skills, and of course, better pay.

They may not be aware of such opportunities existing within the organization unless you publicize them.

When you do communicate openings, most workers will be happy to grab the opportunity as they are likely to be more comfortable continuing in the same organization.

This helps the business save on recruitment expenses as well.

3. Study Turnover Data Meticulously

If there’s more attrition in any specific department it is essential you find out the cause; is it unsupportive managers, dissatisfaction with their roles, not getting along with colleagues, unhappy with salary or benefits, or any other reason.

4. Communicate Properly

Hold town halls and conduct surveys to really listen to your employees; after all, communication is a two-way activity.

You can highlight company vision and regulations, and give an ear to employee problems; recognize employees for their good work, and announce programs for professional development, newly introduced benefits, and so on.

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Improve Tracking and Employee Turnover Reduction with HR Software

A robust, feature-rich HR management software like Tranquil can help you bring down employee turnover significantly by

• Helping HR personnel to collect and study data easily and track HR metrics that can help bring down attrition (including turnover KPIs). HRIS analysts can provide concrete answers to managers rather than confusing spreadsheets full of figures which they need to decipher.
• Enables companies to identify problems with absenteeism, and implement predictable and flexible scheduling systems that employees need.

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• Setting off alerts at preset triggers; for example, when an employee completes one year at a company, the manager is notified of it. This shows that the employee is not merely job hopping; it also helps the manager to make the employee feel valued by having a small celebration of the work anniversary, and so on.

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• Linking performance KPIs with company goals can help recognize and reward the achievements of employees. It can also help you to see what is your employee strength hierarchy wise and to prepare the junior employees to advance to the next level of seniority with the proper training and well-defined career paths.

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• Easing the transactional elements of the employee’s job and making it accurate, like correct calculation of payroll and timely payment, smooth onboarding, correct tracking of accrued vacation days, ensuring easy enrollment for benefits, responding quickly to their queries and redressal of their solutions, can go a long way in improving employee satisfaction and reducing churn.

With the right HRMS like Tranquil, you can provide a better employee experience, improve engagement and satisfaction, and reduce employee turnover rates. This can help your company save costs and improve productivity across the organization. Tranquil can help you keep your employees happy and productive. If you’re not sure yet, simply schedule a demo at a time of your choosing, and we’ll be happy to show you how.

 

While most people think that it’s the product, marketing, or the founders that make a company successful, it’s only partly correct.

What makes a company successful, is the human resources – the employees.

If you are one of those people tasked with choosing those people, it can be pretty daunting.

Human Resources management is a challenging job – crafting company policies, hiring new talent, managing employees, and ensuring timely payments – it’s a lot, and it’s easy to make mistakes.

Common HR Mistakes

Let’s take a look at the most common HR mistakes and how you can avoid making them.

1. No HR Plan

Not having an HR plan in place can turn out to be pretty risky, as it will lead to uninformed and random decision-making, and it may not be the best thing for your business.

To craft an HR plan, you can take a look at what the big companies in your industry are doing, and develop something on similar lines.

An HR plan will guide you about your staffing requirements – how many employees to hire, the order or priority for each departmental staffing, and more.

This also affords the time to think about and start drafting your HR policy and procedures.

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2. Not Documenting, Displaying, and Updating HR Policies

This is one of the biggest HR mistakes to avoid.

Depending on your region of operation or industry, there may be regulations that necessitate displaying posters providing details on important sections of regulatory compliance related to labor laws, medical leave, etc.

Therefore, every business should record its policies and procedures properly.

Policies should be framed regarding BYOD, social media use, safety at the workplace, appraisals and promotions, disciplinary actions, and so on.

These policies must be in line with government regulations.

3. No Employee Handbook

While you may find it unnecessary, it is a valuable tool for small businesses.

Employee handbooks clearly state what employees can or cannot do at the workplace, their rights and duties, safeguards, and more.

HR policies are mentioned in full so that your employees have a manual and are aware of what is expected of them, the company policies and procedures, and the like.

You can make use of templates for the same.

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4. Inadequate Interdepartmental Communication

It is important for the various departmental heads to communicate with the HR management and inform them of their expectations regarding the number and type of employees they need for their departments.

The same has to be communicated properly to the prospective candidates as well so that everyone is on the same page regarding expectations, job roles, duties, and skills needed.

This way you will be able to get the right persons to apply for the job in the first place.

5. No Proper Hiring Process

It can be daunting to work out how to hire and whom to hire when your company is relatively new, or your HR personnel is new; not having adequate information regarding the process or the recruitment methods your company needs to get the right fit can lead you to create mediocre job descriptions.

This could translate into hiring employees of a low quality and not really the right people for your business.

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It is vital that the HR department has ample information regarding the resources required and recruitment methods that will be ideal for your company.

You need to know the desired skillset of your employees, and the number of people you may hire in the near future, and so on.

You can take advantage of several resources and tools available for this purpose, hire a recruitment firm if you have the funds, or, invest in a robust HR solution like Tranquil.

This will help you streamline your HR process from end to end.

6. Not Training Employees

Unfortunately, many businesses look at training as unproductive and unnecessary, and is a huge HR mistake; they feel that employees will automatically learn on the job.

If you do that, you will have employees with haphazard skills and half-baked knowledge.

But if you provide proper training, your employees will be able to perform their tasks more efficiently and be more productive.

Training helps in lowering turnover rates as it makes employees feel valued, and that the company wants them to be successful, for which they are taking requisite measures by way of their professional development.

Happier employees mean less attrition.

Therefore, you must ensure you provide adequate training.

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7. No Proper Onboarding

The interview of a candidate is the first step in a proper hiring process, and it is followed by an orientation.

The hiring process ends once the candidate is handed their offer letter, and they start their work.

A systematic onboarding process helps in retaining new recruits and boosting their productivity.

When new employees come in, they need to be provided the right orientation training, and their workstations must be properly set up.

It is a good idea to have an onboarding checklist so that the whole process is seamless – it will also help to make the employees feel more comfortable and quell their apprehensions.

The checklist can guide the HR employee in charge, the new hires, and the managers with a list of what is to be done in the first few days, helping them be more productive early on.

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8. No Retention Planning

Getting qualified and high-performing employees to stick on at the company is even more important, and probably difficult, than even hiring them.

You should try to think what motivates your employees by taking feedback or individual discussions and create experiences that are aligned to those motivations.

Employees all over the world are most concerned about these factors:

• Job security
• Work/life balance
• Health – physical and mental
• Fair treatment
• Getting recognition
• Trustworthy and supportive coworkers
• Financial stability
• Proper rewards for achievements

When you take measures that improve these areas, you will see that your employees are happier, they display more loyalty and are more productive.

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9. Bad Hires

Hiring the wrong people can cost any business dearly.

The wrong person does not necessarily mean that they don’t have the required qualification or skill set; it could be about mismatched values, attitudes, and vision too.

Whether it’s professional or interpersonal skills, if your new hires lack them, you will have to spend a lot of time, money, and effort in training these people to acquire those skills.

To avoid hiring mismatched professionals, it is a good idea for the interview process to take place in rounds – managers, executives, and coworkers – to get a more balanced opinion about the person.

You will get an idea of the general attitude and abilities of the candidate, and this will help immensely in taking the final decision.

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10. No Records of Performance Issues

When you document issues in performance, it enables employees to improve their daily tasks; more importantly, in case there are legal repercussions, this becomes important evidence.

The company can show that they had a valid reason to discipline the employee.

The record should mention the expectations from the employee and their failure to fulfil them, or company rules and regulations and the violations committed by the employee, any previous disciplinary action or counseling, the expectations in the future, and consequences in the event of not fulfilling them.

You could also include performance improvement plans in this document

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11. Incomplete or Missing Employee Information

It is essential to have complete information about your employees including the full address, contact information, bank details, the date they joined the company, years in a specific role, performance appraisals, promotions, pay hikes, leaves, recognitions, salary, benefits, disciplinary actions – everything.

This will be of help in many situations like considering promotions, disciplinary actions, pay hikes, recommendations, and so on in the future, in addition to ensuring proper and timely payment of wages.

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12. No System to Evaluate Performance

This is a very serious HR mistake to avoid.

When you conduct performance appraisals, it has two purposes: one, employees know that they cannot slack off, and will do their best to be productive; two, they will be happy that their efforts will be recognized and rewarded.

By not conducting performance appraisals or recording them properly, you will either encourage employees to slack off or make them unhappy.

HR automation also helps in tracking performance reviews, via continuous, comprehensive feedback from departmental heads, peers, executives, and self-assessment; in other words, through an agile process.

This helps employees feel heard and assures them the chances of future improvement.

These reviews should be taken seriously so that both managers and employees know that they are important.

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13. Non- Compliance and Potential Litigation

HR teams must be alert to any change in the laws and regulations related to human resources or labor, and immediately notify changes to employees and managers.

This helps everyone in the company to be aware of compliance expectations.

It also helps the company to stay compliant and avoid lawsuits by employees due to non-compliance.

14. Unsecured Data

Businesses of all sizes face multiple cyber-security risks like data breaches and theft, ransomware, phishing attacks, and so on.

When employee information is compromised, malicious persons can use their credentials to steal sensitive financial data and even commit financial fraud.

Unsecured data can prove to be one of the most expensive HR policy failures.

It is important that you have tight measures in place and train your employees regarding data security. Guide them on the need to have strong, cryptic passwords and the need to change them on a regular basis to reduce the risk of a data breach.

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15. Inadequate Payroll System

Payroll is one of the most complexes, yet important HR processes, which must be carefully handled to avoid wrong payments.

If you are careless, you may calculate salary or bonuses wrongly, or not compensate employees adequately for work-related accidents, leading to unhappy employees.

When you don’t record employees’ information or classify them wrongly, you may end up delaying their payroll.

Unfortunately, it’s all too common.

The best way to avoid this HR mistake is to automate your payroll; automation can also help you maintain compliance with labor, wages, and compensation laws.

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Automate your Payroll System Now with Tranquil

Tranquil’s automated payroll system can help you stay compliant, and have error-free, timely payroll calculations.

All the necessary information is stored in a centralized database, and exact calculations will be performed for each and every employee depending on their role, salary structure, benefits, actual time worked, and so on.

The system maintains proper records of due wages and payment dates, eliminating mistakes often made in manual systems.

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To Sum Up

By avoiding these common HR mistakes, you can run your business smoothly and efficiently. You can hire the right people, inform them of your expectations and their rights, retain them, make them feel valued, boost their productivity, ensure compliance, and protect yourself from litigation – all with a robust HR solution like Tranquil.

We’d be happy to show you how it works and how easy your HR processes can be – just be sure to schedule a free demo at a time of your convenience.