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Cashing in on Your Numbers: Key Metrics for Managing Your Cash Flow
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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.

Metrics for Purchasing

On the flip side, you can think about how much of your business/cash flow involves working with vendors. As a customer, your business may be losing money by submitting late payments to your vendors.  To avoid confusion, I will refer to invoices that are received by your business as bills.

Metric 1: Percentage of Bills Paid on Time

This is essentially the same as Percentage of Invoices Paid on Time in payment terms except the focus is on whether your business paid bills on time. Take the number of invoices paid on time by your business to your vendors last month and divide this by the total number of invoices you received from all your vendors last month.

Metric 2: Percentage of Payments Paid on Time

Unlike the first, this metric focuses on the amount of payments paid on time for goods and services received by your business. Take the total payments made on time for bills last month and divide this by the total amount paid for all bills 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.

Jennifer ShinFounder and Principal Consultant, 8 Path Solutions LLC
Jennifer is the Founder & Principal Consultant of 8 Path Solutions LLC, a NYC based management consultancy and data science startup that aims to bridge the gap between science, technology and industry and tackle real world challenges.
www.8PathSolutions.com | @8PathSolutions | Facebook |More from Jennifer

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Discussion (2) Comment


  1. Kelly BorosVisitor

    Average time to payment is a great metric to use to help better manage your cash flow. If your customers are taking more than 30 days to pay an invoice, or if they continually have outstanding balances, it may be time to let said customer go. You’ll want to focus your efforts on your customers who contribute to your cash flow instead of wasting time trying to chase down payments from those who are habitually late.


  2. Ivan WidjayaVisitor

    These are really great terms to learn. Though I’ll admit that I am still pretty weak in the financial area, I am still quite lucky I have some people who can help me in that. But I guess finance is a topic that you cannot avoid when you’re in business.

 

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