More cash available for monthly bills
If you’ve ever faced cash flow problems in your company you should know that you’re not alone. 69% of entrepreneurs are kept up at night with concerns about cash flow.
So how can you avoid critical situations? Try to use your money as efficiently as possible and avoid blocking your cash in inventory, A/R or anywhere else. Use efficiency ratios to gain more control over these activities:
- Inventory turnover – measures how many times a company sells its inventory during a given period of time
- Days in inventory – measures the average number of days inventory is stored before selling it
- Days sales outstanding – measures how long it takes for your clients to pay your invoices
- Days payable outstanding – measures how long it takes you to pay all your suppliers
- Cash conversion cycle – measures the amount of time a company needs to convert its inventory into cash at hand
DSO (Days Sales Outstanding) is one of the indicators that you should really keep an eye on as it highly influences your cash position over time.
DSO = (Accounts receivable / turnover) * 360
Try to keep a balanced DSO, not too low – it can badly influence your commercial relations – and not too high either.
As in most cases businesses face the second situation, here’s what you can do in order to obtain a desired DSO:
• Check your future clients prior to signing any contract;
• Send all invoices on time;
• Offer various payment methods;
• Offer your clients an easy way to reach you in case they have any questions;
• Send reminders;
• Implement early payment discounts.
Are you looking for a similar simple explanation for the rest of efficiency ratios? We put everything together in our last free ebook, Top financial indicators every entrepreneur should know.