Keeping Tabs on Cash Flow

By David Worrell of Entrepreneur Magazine



The amazing thing is that every company has the power to both predict and avert sales-related cash-flow problems. A few numbers from your balance sheet and income statement are all you need to be warned of an impending problem.

Let's say you run a fine-wine distribution business -- the kind that sells by the case to restaurants and retailers. If all your customers paid cash on delivery, you'd have no problems. But these days, more and more customers are asking to pay on terms -- and some are already falling behind on payments. How long can you keep that up?

Obviously, things are going in the wrong direction, but don't panic. Instead, grab your bookkeeper and a calculator to look into your cash-flow future.

The Here and Now

The calculation is quick and painless. Start with accounts receivable from the balance sheet (the total dollar value owed to you by customers) and the past 12 months of sales from the income statement. Use this simple formula to find the average number of days it takes you to collect money from customers. This is called "days sales outstanding," or DSO.

That's half the story. Now look at how quickly you pay your bills. Start with the total amount of accounts payable (the total dollar value you owe to vendors) and the 12-month sales number from before. Using the formula below, you can easily find the number of days you take to pay your bills, which we call "days payables outstanding," or DPO....