Cash Management Metrics


Cash management is a critical activity of the corporate treasurer and has two principle objectives:

• Maximising the availability and application of cash balances
• Minimising liquidity risk

Critical to achieving those objectives is the use of cash management performance metrics, allowing the treasurer to gain insight into sources and uses of cash within the company, as well as helping predict flows and assess the level of earnings on invested funds.

Cash conversion cycle


The cash conversion cycle is the period of time from the payment of cash for the production of goods (raw materials, storage, payment to employees) to the time when cash is received for those goods. In the case of services the cycle spans the date of payments to employees to receipts from sale of services – usually a much shorter time period than for goods.

The shorter the cash conversion cycle, the more cash that is available for other purposes.

The cash conversion cycle is calculated by adding together the days of sales in accounts receivable (Days Sales Outstanding – DSO) to the days of sales in inventory (DIO) and subtracting the days of payables outstanding (DPO). So, for example, if a company has 70 days of sales in accounts receivable, 60 days of sales in inventory and 50 days of sales in accounts payable, its cash conversion cycle is as follows:

70 Days Receivables + 60 Days Inventory - 50 Days Payables = 80 Days Cash Conversion Cycle

Days sales outstanding (DSO)


The days sales outstanding (DSO) metric measures the effectiveness of a company’s credit and collections policies. The measure can be applied at a company-wide or individual customer level.

The formula is as follows:

(Accounts receivable / Annual revenue) x Number of days in the year

For example, a company has an accounts receivable balance of €5m with an annual revenue of €30m. Its DSO figure is as follows:

(€5m accounts receivable / €30m annual sales) * 365 = 60.8 days

There is no universal benchmark to definitively determine good or poor accounts receivable management – it depends on the industry in question. Instead, measurement should focus on the variance with the company’s credit terms. So, for example, a variance of more than, say, 20% above the stated credit terms might indicate a lax credit policy. Conversely, a DSO figure that corresponds closely to the prescribed credit terms indicates that there may be room to relax credit policy.

Days in Inventory Outstanding (DIO)


The days sales in inventory (DIO) figure measures the amount of time it takes for a company to convert inventory into sales. A relatively small number indicates that the company is efficient in selling its inventory while a relatively high number means that the company may be over-invested in inventory.

The formula for DIO is as follows:

(Average inventory for the year / Cost of goods sold) x 365

So, for example, a company with an average inventory of €12m and cost of goods sold of €40m calculates its DIO as follows:

(€12m Inventory / €40m Cost of goods sold) * 365 = 109.5 days

Days payables outstanding (DPO)


This figure measures the number of days a company is taking to pay its suppliers over a period.

To calculate, it is first necessary to calculate the total accounts payable turnover – that is the number of times the company’s accounts payable is turning over for the period. This is calculated as follows:

Total supplier purchases / (Beginning A/P + Ending A/P) / 2

For example, a company that has total purchases for the year of €40m, with a beginning accounts payable figure of €2m and an ending accounts payable figure of €3m will have accounts payable turnover as follows:

€40m Purchases / (€2m Beginning A/P + €3m A/P) / 2
€40m / €10m / 2 = 8 times

To calculate the DPO figure, divide this figure into 365 as follows:

365 Days / 8 = DPO 45.6

Top Judgments Registered

11.11.2020

Urban Green Private Limited
Address: R/o Atkins Hall, River Towers, Lee Road, Cork
Amount: €734,547.90

10.11.2020

Thomas O'Brien
Address: Castlegrace, Clogheen, County Tipperary
Amount: €93,749.13

10.11.2020

Margaret O'Brien
Address: Castlegrace, Clogheen, County Tipperary
Amount: €87,979.01

06.11.2020

Sean Browne
Address: 24 Woodlands Avenue, Arklow, Co Wicklow
Amount: €38,094.60

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