When it comes to a small business, some types of days are more important than others, especially when it comes to small business cash flow.
Day In, Day Out – 5 Days that Impact Small Business Cash Flow
We often think of saving time in terms of shortening the amount of time we spend on a given activity; however, there are some things you can do in your business to save time and resources that will give you back days, weeks and even months you can use to build your business more quickly.
Our business financing tools are specifically designed to help small and mid-sized businesses grow more quickly by improving cash flow. We facilitate this by allowing a business to unlock the money tied up in their invoices by factoring (selling) them to us.
Lack of readily available working capital is one of the main reasons that small businesses fail, or fail to thrive. In fact, a business can be profitable and still lack the operating capital needed to meet expenses or take on new business.
Receivables financing empowers an organization to access money “on the books,” as represented in unpaid customer receivables.
By reinvesting in the business more quickly, an organization can take on new business, serve bigger accounts, fulfill larger orders or expand. Likewise, money financed in a merchant cash advance or from factored invoices can make or break an organization’s ability to meet unexpected expenses, replace or repair equipment or cover payroll and operating costs during slower months of the year.
The 5 Types of Days that Matter Most to Small Business Cash Flow
1. Days Sales Outstanding (or DSO)
The average number of days between a sale and revenue collection. The higher a small business’s DSO, the more time that is lost between making a sale and collecting payment for that sale. For organizations that pay commissioned brokers or salespeople, this might even mean a commission paid out before revenue from a sale is collected. A high DSO can negatively impact cash flow, but can also point to other potential areas of concern such as a poor billing or collections process.
2. Days in the Average Collection Period
This is the approximate or average number of days that it takes for a business to receive payment of customer / client receivable invoices.
Days = total number of days in the period
A/R = average amount of accounts receivables
Credit Sales = Total amount of net credit sales during the period
For a small business that invoices its customers, keeping the average collection period as low as possible is important. The faster a receivable can be turned from money owed into money in the bank, the faster a small business can take on new customers, fulfill larger orders or grow by expanding into new locations, products or services.
3. Days for Working Capital Turnover
Working capital turnover refers to the depletion of working capital (to fund operations and purchase inventory) compared to sales during a given period of time. Determining this number can help you understand how effectively your organization is using its small business cash flow and working capital to generate new sales.
A high number here indicates that your business is generating a lot of sales compared to the amount of working capital being used to fund operations and purchase inventory.
4. Days for Receivables Turnover
Your receivables turnover rate indicates how effective your business is at extending credit to your clients as well as how good it is at collecting on those debts. For small business cash flow, it’s usually important to have receivables turnover as quickly as possible, in order to reinvest in the organization.
Extending favorable terms to your clients can help you attract new customers and provide a competitive edge; however, waiting for those clients to pay can impact your ability to keep growing. Factoring invoices is one way you may be able to get immediate access to up to 98% of a customer receivable invoice, while still extending favorable payment terms to your customers that you need to be competitive.
5. Days Reflected in Churn Rate
Churn rate refers to the number of customers or subscribers lost in a given number of days, weeks or months, especially as compared to the growth rate (rate at which a company is adding new clients or new subscribers).
In order for your business to grow, your growth rate must be faster than your churn rate (you must be adding more customers than you are losing). But even if you are gaining new customers more quickly than you are losing customers, you still want to pay close attention to your organization’s churn rate.
Closely related to customer retention rate, a high churn rate could point to several areas of organizational concern, such as customer dissatisfaction, a poor lead qualification process or lack of competitiveness in a key area.
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Looking for a working capital solution? Apply for a free, no-obligation cash flow financing solution and find out how to unlock the funding you need to grow your business.
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