What do you think of when contemplating metrics? Most organizations measure everything in sight whether the information is useful or not. But the truth is, metrics are critically important when it comes to cash management – just as cash management itself is critical for the health of any business. But you need to understand which metrics to use, and how to apply them, to promote your organization’s cash-health.  

The first step is figuring out what you want to achieve with the data you collect about cash. Do you need indicators alone, or do you need data that will guide your decisions? To explain this question, think of the difference between the fuel gauge on your car and the speedometer. The fuel gauge is just telling you how much gas you have burnt and how much you have left. Other than pulling over or possibly turning off the air conditioning, this gauge doesn’t really influence your current actions. The speedometer, however, helps you stay within proscribed limits.   

Next is understanding the difference between the two types of basic types of cash-related reports: 

• The balance sheet measures a company’s assets, liabilities, and shareholder equity at a certain point of time. 
• The cash flow statement records the cash a business receives and spends during a specific period.

A company can have a positive cash flow during a period, but its balance sheet might be constrained if it is also highly in debt. Conversely, a company sitting on a pile of cash can endure periods of a negative cash flow and remain highly liquid. 

The additional cash metrics that you’ll use to assess your business’s health, include: 

Days Inventory Outstanding (DIO) 

DIO measures the average number of days inventory is held before sold. This is like golf – lower numbers are better. You calculate DIO by taking the value of your inventory on hand and divide it by the cost of goods sold (COGS) then multiply by 365. This yields the average number of days it will take to convert inventory into cash.  

Example: There is $500,000 of inventory on hand and the COGS for the period is $2,000,000 

($500,000/$2,000,000) × 365 = 91days inventory on hand 

Days Payable Outstanding (DPO) 

DPO measures the average number of days it takes to pay suppliers. Unlike golf, the higher numbers tend to be better. In other words, you will want to hold onto cash as long as possible before paying vendors, but there are very real limits on acceptable behavior. The best strategy is to look for longer Accounts Payable (AP) days to offset the days of inventory on hand and the days it takes you to get paid. DPO is calculated by taking the amount of trade payables owed divided by COGS (or sales) and then multiplied by 365. 

Example: The amount of payables currently owed is $750,000 and COGS is $2,000,000  

($300,000/$2,000,000) × 365 = 54 days payable outstanding  

Days Sales Outstanding (DSO) 

DSO measures the average number of days it takes to collect money from customers during a period. Back to golf; a lower number of days is better. You want to get paid as quickly as possible. To calculate, take the amount of Accounts Receivable (AR) open at the start of the period and the amount open at the end of the period and calculate the average AR for that period. Then divide that by the sales during that period and multiply the result by the days in the period.  

Example: At the start of the year, there was $850,000 in open AR and $960,000 in open AR at the end of the year. The average AR during that period was $915,000. There was $4,500,000 of sales. 

($915,000/$4,500,000) × 365 = 74 days sales outstanding