As a CFO, I do cash flow analysis for clients. This is not often easy because there are a lot of moving parts.  Two of my go-to metrics are Days Sales Outstanding (DSO) and Days Payables Outstanding (DPO). DSO tells you the average number of days it takes a company to collect their accounts receivable. DPO tells you the number of days it takes a company to pay its trade creditors. If you are paying your trade creditors faster than you are collecting your receivables you probably identified one source of a cash flow problem.

DSO is calculated by taking your accounts receivable as the numerator and total credit sales as the denominator. Multiply that quotient times the number of days you are tracking and that is your DSO. Let's get more specific as to the numbers. You can take the accounts receivable off of your balance sheet. Most companies' total credit sales are usually their total sales, however if they can specify a certain percentage of sales that they know are COD they can deduct that from sales to determine credit sales. The number of days represents the number of days you are tracking.  For example, if you want to determine what your DSO is for the fourth quarter you take the accounts receivable on the December 31 balance sheet and put it in the numerator and then you take your total sales (assuming all your sales are credit sales) for the fourth quarter off of the income statement and put it in the denominator. Then you take that quotient and multiply it times 92 days which are the number of days in the fourth quarter. That will give you a DSO.

DPO is calculated by taking your Trade Accounts Payable as the numerator and Cost of Sales as the denominator. Multiply that quotient times the number of days you are tracking and that is your DPO.  To be more specific, you can take the Trade Accounts Payable off of your balance sheet or Accounts Payable Detail. Keep in mind that your Trade Accounts Payable are the amounts you owe to your inventory vendors versus your expense vendors like the phone bill or Office supplies.  Take the cost of sales off of your income statement. The number of days represents the number of days you are tracking.  For example, if you want to determine what your DPO is for the fourth quarter, you take the Trade Accounts Payable on the December 31 balance sheet, put it in the numerator, take your cost of sales for the fourth quarter, and put that in the denominator. Afterward, you take that quotient and multiply it by 92 days which are the number of days in the fourth quarter. That will give you a DPO.

As a CFO, these are my go-to metrics when making a quick assessment of a cash flow problem.