Quantifying the Benefits of Cash Flow Improvement Written by Kaizen Enterprises Pty Ltd
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The benefits of improving your business' cash flow are easily calculable.

Firstly, you can calculate how long on average it takes for your business to get paid after an invoice is issued. This is called the Days Sales Outstanding (DSO) figure. Once you have obtained your current DSO, you can multiply a reduction in DSO by the quantity of the reduction in days and multiplying that figure by the present cost of funds. In addition to the decreased the cost of funds, reducing the DSO also leads to a reduction in bad debt write-offs.

Days Sales Outstanding

Tracking your DSO figures allows you to calculate how long on average it takes to get paid after an invoice is issued. If this figure isn’t measured, then it won’t be possible to measure progress in collecting funds and to address issues arising regarding the time taken.

  1. Calculate your current DSO. You may use the formula you presently use, or alternatively you may use our automated DSO Calculator. This is completely anonymous and retains no information. Click here to access the DSO Calculator.
  2. Once you have determined your current DSO, you can calculate best possible DSO as follows:

    Average Current A/R balance last 3 Month Ends x 91
    Credit Sales for the last three months
  3. Finally, you can subtract the answer in Step 2 from that of Step 1 to get the number of days delinquent.

The difference in DSO from actual to possible is the Opportunity for Improvement. When this is known, the wasted cost of funds from supporting delinquent debt can be established. In addition, the reduction in cost of funds can be calculated.

Cash Flow Calculator

Our Cash Flow Calculator can be used to estimate the benefits that effective receivables management could bring to your business. By completing the fields in the Calculator, you can establish the current cost of funds for your business and see the impact that a reduction in your DSO could create. The Calculator can be downloaded to your computer by clicking here. It does not transmit any information to Kaizen Enterprises or any third party.

Click here to download the Cash Flow Calculator. (Note: May take a up to one minute to download, depending on the speed of your computer.)

Attachments:
Download this file (cfcalculator.xls)cfcalculator.xls[Cash Flow Calculator]30 Kb