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Debtor/creditor days and w/c requirement calc

question about working capital/cash requirement calculations

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I'm looking for some opinions on the best way to forecast cash requirement from balance sheet numbers.

I'm being asked the age old question "If we're making profit, why haven't we got any cash" so I'm trying to put together some balance sheet indicators that highlight the cash requirement of the business.

I started with the usual cash cycle calculations - debtor days minus creditor days = number of days that requires funding, but I'm looking for something that would give me a monetary value rather than a number of days.

I've been looking at some things that suggest using the 'days' as a proportion of revenue (for debtors) and as a proportion of CoS (for creditors).

My question is regarding creditor days - why do all of the sources base creditor days on CoS rather than all credit purchases? I mising something here or would a better calculation of creditor days be based on Total Costs (including CoS) less; depreciation, Payroll costs, Interest, ...and any other non-credit items.

Surely everything needs to be paid for while you're waiting for your debtors to come in? I over-thinking this? :-)

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By WhichTyler
12th Mar 2019 17:43

Maybe because overhead Crs are more stable than CoS Crs? maybe because you can measure Cos directly from the published income statement? Which 'sources' are you referring to?

But you know your business best, so do what ever suits you...

(Capex, debt repayment, dividends/drawings may be more material than monthly fluctuations on the phone bill)

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Hallerud at Easter
12th Mar 2019 18:18

Quite a few costs really have no credit terms, rent is due when due, rates fall due when due, unless say Premium Credit used then insurance needs paid when it falls due, if you include this within the purchases/sales cycle modelling I suspect you will really distort the picture re the art of the possible re debtor/creditor days.

The fact is that you have little credit availability for a fair few costs so really, for simplicity using sales/cost of sales will likely give a reasonable initial understanding and unlike a lot of other costs you do at least have some control over the quantities/values re sales/cost of sales (if fixed cost components excluded)

Frankly, if I wanted to model cashflow better, I would create an excel model with monthly/quarterly P & Ls , Balance Sheets and Cashflows , if you try to forecast pressure points re cashflow without such a model you often miss things like lumpy vat payments, corporation tax payments etc from your appreciation of likely future cash availability, imho if cashflow management is crucial to business survival then not preparing , monitoring and thereafter modifying/amending such forecasts is criminal

You can also write the model so that say monthly sales debtor days can be adjustable, e.g 30% in month 1, 30% month 2, 30% month 3, 10% month 4, this then permits lots of what ifs to be considered to improve matters.

Debtor/creditor days are useful as a quick look indicator that there is an issue but cashflow modelling is imho really needed to make any progress re solving the underlying issues..

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Replying to DJKL:
By WhichTyler
13th Mar 2019 22:25

This too...

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By tom123
15th Mar 2019 10:13

If you are working internally, rather than externally, you really need to move away from ratios and towards actual information such as aged debtors lists, with actual days to pay per customer etc.

You need a thirteen week (by week) cash flow forecast, which you update at least weekly.

Try not to get too hung up on financial reporting when you are managing cash flows.

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By Sue Murby
21st Mar 2019 14:39

Have you considered the amount of money taken out of the business buy the proprietors? This may be an obvious question but I've often found that clients can't distinguish between their own funds and the money required to run the business. Two years ago I started switched from preparing just an I & E statement to full accounts as my client's turnover was increasing. 2017 profit was around £35k and 2018 was about £71k. His drawings were around £134k and his capital account is overdrawn by £34k. Just an example although somewhat extreme.

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Replying to Sue Murby:
By Manchester_man
23rd Mar 2019 17:49

Oh yeah, I've seen many such clients over the years, mostly limited companies. They draw whatever they want, whenever they want, then 9 months later when the CT is due, they cry "the company can't afford the CT liability". I've even had them say to me "how can the company have made a profit and have tax to pay when there's nothing in the bank" (months after the year end).

Accountant: because you have drained the company until the is nothing left".

Client:. (In a high pitched voice) But that was me wages ...

I now refuse to deal with such clients. Simply not enough hours in the day.

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