Managing Cashflow Requires Purposeful Pacesetting

Companies with a traumatic productivity culture must focus on cash flow.  Rather like a marathon runner has a pacesetter to do a put in a good time, when trauma strikes, a business needs its own pacesetter to measure the pace of cash flow collection, because without cash, as we all know, a business will fail.

As with anything, in order to manage it, we need to measure it.  Whether this is a cash flow forecast or through the measurement of debtor days, the measurements highlight the pace of cash collection.

What many business owners haven't worked out, is a reduction in debtor days of 5 days will generate an increase in the bank balance equivalent to average weekly invoicing (assuming everything else stays the same).

Whilst debtor days is a great measure, albeit underutilised, it can also lie.  Debtor days measures the average number of days between an invoice being issued and the cash is received.   However, there are often ‘lost days’ due to the time taken to process the invoice.

Consider for example the business where responsibility for invoicing lies with a part-time member of staff.  If goods are shipped, it may be one or two days before the invoice is issued.  The debtor days calculation will not include these extra days.

Another common practice is to invoice at the end of every month.  This makes sense for some businesses who are on a monthly retainer contract, or who are issuing regular monthly invoices.  Month-end invoicing however almost always results in delay with issuing invoices.  Services delivered at the start of the month, may not be invoiced for several days or even weeks, due to the monthly cycle within the firm.  

In situations like this, the debtor days metric will be lying, and the pace of cash flow collection will be slower than we think.

The pace of cash flow is also delayed when problems in the supply chain or operational side of the business result in late delivery of products or services.  Cash that would have been received, is delayed because the invoice can’t yet be generated.

So next time you’re looking at the cash flow metrics in your organisation, ask yourself the question. What isn’t this telling me?