Understanding cash flow jargon in simple business terms - part two

Last week we looked at some terms that will often appear on your financial statements and helped you understand exactly what they meant. This week we'll look at some more finance jargon and build on your accounting vocabulary in the process.

Quick Ratio: The quick ratio is a more accurate indicator of whether your business can make debt repayments rather than a current ratio. The ratio is measured by subtracting your inventory from your current assets and then dividing that number by your current liabilities. Inventory is often more difficult to liquidate than other current assets, so by removing inventory from the equation you are presented with a more realistic indication as to how your business is positioned to make repayments.

Accounts Receivable: Your accounts receivable simply refers to the amount of money that is currently owed to you by customers. This will apply to customers that you have extended credit to and are yet to make repayments.

Accounts Receivable Ageing: The accounts receivable aging is a further elaboration of accounts receivable that analyses payments by when they fall due. For example, you may separate your due payments in monthly blocks, such as 30 days, 90 days or 120 days.

When analysing your accounts receivable aging there is no general rule on the ideal collection time as it is largely dependent on the industry you operate in. However, it is usually a good indicator when the debt that is overdue makes up a small percentage of your total accounts receivable. If you have an increasing amount of overdue debt you may want to consider outsourcing it.

Accounts Receivable Days Sales Outstanding: Days sales outstanding is the measure of how quickly your company will move to collect revenue after you make a sale. Days sales outstanding can be determined by establishing your total accounts receivable and dividing it by your daily average sales. The lower the number, the quicker your company collects revenue. A more specific way to calculate this measure is to divide your accounts receivable by your average daily credit sales.

Inventory: Your inventory directly refers to the total value of the stock your company is currently holding. It's important to note that inventory doesn't exclusively refer to ready for sale merchandise, but also includes raw materials and goods in production.

Slow-moving Stock: This category refers to the stock you have on hand that is selling at a slower than expected rate. For example, if your regular turn around on inventory is 30 days and you have products on hand that haven't sold in over three months, those products are referred to as slow-moving stock.

Stock-out Rate: A stock-out refers to the event in which inventory has been exhausted and products requested by customers aren't available. A stock-out rate is the number of times this scenario occurs per 100 product orders. If the stock-out rate is higher it could be an indication that your business is growing too rapidly and you may need to employ better inventory management strategies.

 

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