Go-To Cash Flow Metrics

Quick cash flow analysis for clients is something I’m called upon to do as a Part Time CFO. Often this is very difficult because when it comes to cash flow there’s usually a lot going on. The first places I look for a good sense of what’s happening is Days Sales Outstanding, or DSO, and Days Payable Outstanding, or DPO. The average number of days a company takes to collect their accounts receivable is the DSO.   The number of days it takes a company to pay its trade creditors is the DPO. You’ve probably identified at least one source of your cash flow problem if you pay your trade creditors appreciably faster than you are collect your receivables.

By taking your accounts receivable as the numerator and total credit as the denominator, then multiplying that quotient by the number of days you are tracking you will get your DSO. More specifically, you can take the accounts receivable off your balance sheet. The total sales in most companies usually end up being their total credit sales, but if a certain percentage of sales that you know are COD can be specified, you can determine credit sales by deducting that from sales. The number of days you’re tracking is represented by the number of days. If you want to determine your fourth quarter DSO, for instance, you’d take accounts receivable as of the balance sheet on December 31st as your numerator, then assuming all your sales for the fourth quarter are credit sales, you’d take your total sales off the income statement and put it in the denominator. Finally you’d multiply all that by the 92 days that make up the fourth quarter.

By taking your Trade Accounts Payable as the numerator and Cost of Sales as your denominator, then multiplying that quotient by the number of days you are tracking you get your DPO. More specifically, you can take your trade accounts payable off your balance sheet or accounts payable detail, and the cost of sales off your income statement. Trade Accounts Payable amounts are the amounts you owe to your inventory vendors, not your expense vendors (such as the phone bill). The number of days you are tracking is represented by the number of days. If you want to determine your fourth quarter DPO, for instance, you’d take December 31st’s balance sheet and use the trade accounts payable as your numerator, then for the denominator you’d use your cost of sales for the fourth quarter. You’d then multiply that quotient by 92 days (the number of days in the fourth quarter).

When making a quick assessment of a cash flow problem, the DSO and DPO are the CFO’s go-to metrics.

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