Keeping Tabs on Cash Flow

Look Into the Future

If you can float your bills longer than your customers do (DPO is greater than DSO), cash will actually accumulate in your business. However, if your customers are dragging their feet (DSO is greater than DPO), cash is going out the door. The bigger the difference (DPO minus DSO), the faster the cash is flowing -- in or out.

So how bad is it? The difference, or "float," is the number of days of sales (in cash) that are flowing in or out of your business each year. So a $1 million business with just one week of negative float will watch nearly $20,000 evaporate from its checking account. (The equation: sales/365 X float.) Worse, this entire drop can happen in just one payables cycle.

Fortunately, there are two ways to put a cork in a negative cash flow: collect more quickly from customers or get better payment terms from vendors. Doing either can plug the gap. Doing both will keep your cash flowing for many vintages to come.