Cash Flow Management – A Useful Metric
There are many financial metrics that can be utilised to look at the working capital and cash flow issues of a business. For the purposes of this post I want to focus on one number that can be a useful tool for a business.
This is a financial metric called days of working capital. To calculate this metric it is:
Working Capital ÷ Sales By Day
Working capital is defined as Accounts Receivable + Inventory – Accounts Payable.
This metric shows how much working capital we have on hand, and we need to cover sales. If the answer comes up as 22, then we have 22 days of working capital on hand to cover sales generation. Whilst this is a historical indicator, it is still a useful number to know to consider sustainable growth ie growth that we can fund from existing working capital.
Too many businesses fall into the trap of growing quickly and not being able to keep up with cash. This number shows a business how many days of working capital they have on hand and thus shows what sales growth is sustainable.
To be able to grow faster it will be necessary to add to working capital. This could be added by taking out a long-term liability, which will add to the current cash position of a business, to ensure that the sustainable sales targets are able to be met. This metric gives an insight into managing the sales and working capital needs of a business.
Photo: Alan Cleaver
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