Why You Have To Understand Your Cash Flow Days

Why You Have To Understand Your Cash Flow Days

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Cashflow days are made up of three components. We've got debtor days which is how long it takes you to get paid, basically. We've got stock days or inventory days or even invoicing days if you're a service business let's say you might not carry a physical stock and you invoice your customers. And so if you wait an extra month to invoice someone, that's hurting your cash flow. And then on the other hand, you've got a creditor days or supplier days is maybe an easy way of saying that.

So, we'll start with debtor days and this is how long it takes you to get paid. So there is a formula to it, and it's basically what your average debtor balance is, and we divide that by your turnover. And an example here is, let's take a business owner who has an average of $50,000 outstanding that clients owe them at any given time. And their annual turnover is half a million dollars, so it's not a gigantic business. To simplify, If you've got a $3 million business, just times these numbers by 6, it's kind of the same sort of principle. So this example here is we've got $50k outstanding on average, we divide that by $500k and times by 365 days in a year. And that means we've got debtor days of 36.5. And what that means in English is that it takes you on average just over a month to get paid from clients. So if you've got say 30 day terms, your average client pays you over that. If you've got seven day terms to pay your invoice, you've got very bad debtor management. If you've got 60 days that you give to customers, you're doing great. So to see how it's all relative. 

The happiness and the business value kind of plays a part in this. If you're feeling that you're emotional, you can probably tell this by how many arguments you might have at home that are driven by your cash flow movements in your business. Perhaps check whether it's every thirty-six days you're grumpy, it may be because every thirty-six days you could get paid and everything feels good. And then you're feeling down again when the money keeps dropping out. So it's not necessarily that you don't have profit in a business, it's just that you're holding your breath for 36 days just to get by. So this is kind of why it's important to really understand your cashflow days. So you can reflect on why you may feel a certain way at a certain time of the month or the end of the quarter depending on how quickly you bill.

 

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