Summary

cashflow is the life blood of a business but it is a difficult thing to grasp as an abstract idea.  "Is my cashflow OK?" is difficult to answer.  Effective management of Accounts Receivables is part of the answer.  The  Accounts Receivable Daily Sales Outstanding (DSO) ratio, and its partner, the Daily Accounts Payable Outstanding (DPO) ratio respectively measure how many days it takes to collect the money owed to you and the days it takes for you to pay your suppliers.  If DPO is more than DSO, you are paying suppliers slower than you are getting money from your customers and you are in a positive position.  It also means you can fund your growth (to at least some extent) from sales.  If the DSO is larger than the DPO, you are paying suppliers before you collect from your customers so you will need an overdraft and may actually run out of cash in the foreseeable future.  Also, you will not be internally generating sufficient money to pay for your growth and will need to find other cash sources for that.

These two ratios should be key metrics on your dashboard so that you can rapidly see if cashflow is becoming unhealthy.

Read this if: you are in business!  Seriously, understanding your cashflow is a basic necessity for a business.  These two ratios help explain your current position and trends.

Relies on:  the use of 'Dashboards' to monitor company-critical information.

Audio/visuals: none.

Degree of Difficultly: yellow belt (entry-level).

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