Cashing in on Your Numbers: Key Metrics for Managing Your Cash Flow
December 27, 2013
Managing cash flow is absolutely necessary for small business survival. After all, wouldn’t running your business be much harder if you can’t figure out where your funds are going?
And while small businesses generally invoice for smaller amounts, using an informal process to handle billing can be risky. The invoicing and accounting practices of your business will directly impact cash flow. Not only that, the metrics you choose are also important and having the right metrics can make a big difference in how you manage your bottom line.
In this post, I’ll cover some key metrics from the perspective of both the payer and the purchaser. Whether you are a vendor, client or both, these metrics can help you keep track of your cash flow and avoid going bankrupt before your business has a chance to get off the ground.
Metrics for Payment Terms
One of the most important factors in managing your cash flow is making sure your clients pay on time. Don’t rely only on your contract when it comes to payment terms and make sure your invoice includes the payment terms. Larger clients are likely to have a separate department for handling contracts and invoices and smaller clients may be too busy to keep track of your payment terms. By tracking payments you receive, you will be better able to strategize on how to best stay in the black.
Metric 1: Percentage of Invoices Paid on Time
This is a very straightforward metric. Take the total number of invoices paid last month and divide this by the total number of invoices due last month.
Metric 2: Percentage Paid on Time
This is essentially the same as Metric 1, but instead of the number of invoices we are looking at the amount paid on time. Take the total paid on time for invoice due last month and divide this by the total amount for all invoices due last month.
Metric 3: Average Time to Payment
If you’re wondering how quickly are your invoices being paid, a simple metric you can use is the average time to payment. This is a bit more sophisticated than the previous two metrics because it requires you to calculate the number of days between invoicing your client last month and receiving payment from your client. Take the average for this number.