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Treatment of disbursements in creditor days?

How do I include disbursements in creditor days and cash cycle calcs?

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Hi, 

Thinking out loud again!

I work for a law firm and my job is to try and bring them in line with the commercial world in terms of MI, KPIs etc.

With each 'matter', along side debtors and creditors there are disbursements that are initially paid by the firm and subsequently charged to the client - so, in addition to debtors and creditors control, there are disbursements receivable and payable.

One of the key cash flow problems that law firms face (apart from not ever bothering to collect debtors!) is that the disbursements need to be paid for before cash is received from the client.

I'm trying to find the best way to model this to demonstrate the cash burden - should I add disbursements receivable in with debtors and payables with creditors?

So the cash cycle would be...

(Debtors/turnover)*365 +

(WIP/turnover)*365 +

(Disbs r/c/turnover)*365 -

(Creditors/credit based costs)*365 -

(Disbs payable/credit based costs)*365

...should disbs recevable be divided by turnover? ...should disbs payable be divided by costs?

 

Also, secondary question. How do I equate the result of the cash cycle to a monetary value (to indicate an overdraft requitrement) ie, if the cash cycle indicates that the business needs to fund 30 days of creditors/disbs - what is the value of the 30 days?

(I'm sure the answer will be obvious when I see it!)

Thanks,

Darren

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By tom123
23rd May 2019 11:49

I would add them to Dr & Cr if it were me - you are only separating them out because of the accounting rules.

As for which basis figure to use - are there significant cyclical effects?

Could you use the previous 4 quarters or something?

Probably important to create a statistic whose numbers you are easily able to obtain from your specific systems - rather than based on a 'number' you are never able to actually find out.

Don't forget VAT will have an effect.

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