Small businesses don’t have the same financing options available to them through banks that large businesses have. But small businesses can use Invoice Discounting as a funding resource that helps them by unlocking much needed cash through Invoice Discounting. The key to managing the finances of a small business lie in the Cash Flow management.
The following explains how five important finance metrics can improve cash flow:
- Days Sales Outstanding
Days Sales Outstanding (DSO) is a measure of the average number of days that a company takes to collect revenue after a sale has been made. DSO is often determined on a monthly, quarterly or annual basis and can be calculated by dividing the amount of accounts receivable during a given period by the total value of credit sales during the same period, and multiplying the result by the number of days in the period measured. A high DSO number reflects more time being lost, which can negatively affect cash flow. It can also alert you that the processes of billing and collections need improvement.
- Average Collection Period
The Average Collection Period is the approximate amount of time that it takes for a business to receive payments owed, in terms of receivables, from its customers and clients. It is found by dividing the number of days, multiplied by the average amount of accounts receivables divided by net credit sales during the period. Keeping this number low is important for most small businesses because it lets them know how many new customers and large orders it can take.
- Working Capital Turnover
The Working Capital Turnover is a measurement comparing the depletion of working capital to the generation of sales over a given period. This provides some useful information as to how effectively a company is using its Working Capital to generate sales. Working Capital Turnover is found when dividing sales by working capital. High numbers represent high sales versus the amount of capital used to pay for operations and inventory.
- Receivables Turnover Ratio
An accounting measure used to quantify a firm’s effectiveness in extending credit and in collecting debts on that credit. The Receivables Turnover Ratio is an activity ratio measuring how efficiently a firm uses its assets. Receivables turnover ratio can be calculated by dividing the net value of credit sales during a given period by the average accounts receivable during the same period. Average accounts receivable can be calculated by adding the value of accounts receivable at the beginning of the desired period to their value at the end of the period and dividing the sum by two.
- Accounts Receivable Turnover
Accounts Receivable Turnover is the number of times per year that a business collects its average Accounts Receivable. The ratio is intended to evaluate the ability of a company to efficiently issue credit to its customers and collect funds from them in a timely manner.
- Churn Rate
Churn Rate is an important measurement because it tells you how many customers you lost over a certain number of days, which could reflect customer satisfaction.
As they say ‘if you are not measuring you are not managing’. Every business needs to measure their performance and have Key Performance Indicators in place which are reviewed preferably on a continuous basis or at a bare minimum at the monthly management meeting. Your Accountant will help you set up Financial KPI’s which are specific to your business.
If you do not have a finance background all is not lost apart from working closely with your accountant, you should consider attending a ‘finance for non-financial managers’ course and familiarize yourself with the financial workings of the business.
Celtic ID are available to help Irish SME’s with their cash flow needs. Our Management Team will give you a quick decision unlike other financial providers. We will speak to you in plain English and give you all the facts you need to make a decision. Why not call us on 01 230 0866 for a confidential conversation.