Five numbers you need to know

Business man
  • The starting point to manage cash flow
  • Tells you where you stand, and if you’ve got cash to meet immediate costs
  • Easy to calculate with accounting software like MYOB and Quicken
  • Or check your bank account balance (online system like CommBiz is a must for this). Deduct any cheques written or payments made that haven't cleared like salaries, rent or regular bills. Then add back cheques deposited and other unprocessed receipts

  • Tells you how long, on average, it takes you to get paid after issuing an invoice
  • If you give credit, it reveals the efficiency of your collection policies and can act as a warning you could be heading into cash flow difficulties

Here’s how it’s calculated:

     Days Sales outstanding = Total receivables outstanding x number of days in period 
                                                Total credit sales (over the period)        


If you have annual credit sales of $547,500 and $60,000 in accounts receivable, then:

               Days Sales outstanding = $60000 x365 

                                                     = 40

  • Track DSO and try to drive the number down
  • Even if sales increase, DSO should stay the same. If it increases, find out why, then get it down
  • Try improving invoicing process, negotiating better terms with customers, or invoicing for progress payments synchronised with your clients’ payment cycles

  • The point at which revenues exactly cover expenses
  • Start by calculating:
    • Fixed costs  such as wages, rent, leases and administrative costs. They don’t include the variable costs of sales. E.g. $100,000 a year
    • Gross profit margin – the percentage of each sale left over after costs of that sale have been covered. It equals total sales minus variable costs, as a percentage. E.g. If you’re selling a toy for $100 which cost $60, the gross profit is $40 and the gross profit margin is 40 per cent
  • Now you can work out how many sales you need to make to break even: 

                       Break-even point = Fixed costs ÷ Gross profit margin

  • Using the figures above: Break-even point = $100,000 ÷ 40% = $250,000
  • You need to sell $250,000 worth of toys to break even each year
  • Break-even analysis helps you work out:
    • Profitability of your product
    • How far sales can drop before you start making a loss
    • Units you need to sell before you start making a profit
    • Effects of changing your price or volume of sales
    • If costs increase, how much you have to sell at current prices to cover costs

Don’t confuse margin with mark-up. Margin is expressed as a percentage of the selling price:

                Margin = Gross profit x 100


Mark-up is expressed as a percentage of the cost price:

                Mark-up = Gross profit x 100


If a new product costs $100 to buy and you need to make 40 per cent to break even, how much do you sell the product for? The answer is $166.70, since a profit of $66.70 on a $166.70 sale gives you a margin of 40 per cent.

Knowing which of your products and services have the highest margin and are therefore most profitable allows you to make the most of them.

Every industry has one which helps you compare with your peers, measure your business’s success, and identify problems. Here are examples:

  • Restaurants – covers per night, wastage
  • Services – staff utilisation rates
  • Hotels – occupancy rates
  • Builders – work in progress, progress payments due
  • Retail – sales per metre of floor space

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Important information

As this advice has been prepared without considering your objectives, financial situation or needs, you should, before acting on the advice, consider its appropriateness to your circumstances. View our Financial Services Guide (PDF 59kb).