Sign & Digital Graphics

April '20

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S D G M A G . C O M • A P R I L 2 0 2 0 • 5 3 of days it takes to "turn" your inventory. The figure you will use for inventory comes from the Consolidated Balance Sheet and represents the value of finished goods and raw materials that will eventu- ally go into producing those goods. You simply divide inventory by the average daily cost of goods sold to arrive at your DIO expressed in days. Cost of goods sold (COGS) is the sum total of what it costs you to produce and fulfill the goods and services your customers buy. Materials, manufacturing labor, packag- ing and delivery costs account for most of the COGS. For example, if at the end of the year, a company's inventory is valued at $25,000 and its COGS was $300,000, the DIO would be 30.4 days. Here's the calculation: D I O = Inventories ÷ (Cost of Goods Sold/365). Thusly, $25,000 ÷ ($300,000/365) = 30.4 days. For any size of business, a DIO of about one month is an accomplishment. When inventories pile up because sales are lagging, the days inventories out- standing can begin to spiral out-of-con- trol. Thus, as you might guess, the actual number of days is not as important as the direction of a DIO trend. Keeping an eye on and tracking your DIO every month using the figures from the last three or six months is not a bad habit to get into. Just remember you will then take the rev- enues for a rolling three-, six- or twelve- month period and divide by the number of days in those months—91, 182 or 365 days, on average, respectively. Gotta Love That AR The second component of the cash- conversion cycle is days sales outstand- ing (DSO). This is the amount of time it takes your business, on average, to collect money after it has sold and invoiced a product or service. You are going to use your average daily revenue figure and the value of accounts receivables from the asset side of your Consolidated Balance Sheet. If, at the end of a reporting period in the example above, the accounts receiv- ables ( AR) was $33,000 and total annual sales were $600,000, the average daily sales would be $1,644 ($600K ÷365) and the DSO would be 20 days. Follow the math: D S O = Accounts Receivables ÷ Average Daily Revenue = $33,000 ÷ $1,644 = 20 days. An acceptable DSO for a sign business is going to depend on how much credit it extends to its customers. If it is a "cash on the barrel head" operation and does not extend credit terms to its customer to pay for delivered goods, its DSO should Every business decision can be measured against the effect it has on a company's financials.

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