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Article By Brent Charlton | | Accounting & Tax

Cash is King, President and Empress.  Without it running a business is impossible (once the credit runs dry).  Therefore, you need to know the 3 things about your supreme leader General Cash:

  1. What Cash you have today,
  2. What Cash you should get tomorrow, and
  3. What Cash you have promised others.


In my opinion, a creative business should have available cash of between 1-2 months of their break even point.  Every creative business owner should know what their break even sales point is to ensure they know how much cash is required each month ‘to keep the doors open’.  For creative businesses the large expenses will be rent (5-10% of turnover) and staff remuneration (35-50% of turnover), including yours of between $100,000 – $150,000, after all you shouldn’t work for nothing and have to pay the mortgage somehow.  All your other expenses, should total between 7-12% of turnover.

This calculation should be done every time there is either a significant change to your business, such as new staff, or at the beginning of a new financial year in the form of a financial budget or as like to refer to it, creating your financial goals.


It’s now time to calculate your break even.  I recommend using the last 12 months Profit & Loss Statement.  The more up to date the statement, the more meaningful the analysis.

ExpensesExampleYour Firm
Staff Remuneration50%$500,000  
Owner Remuneration $150,000 
Other Expenses12%$120,000  
Total Annual Expenses/Break Even Point$850,000
Average Monthly Expenses/Break Even Point
1 Months Expenses (Divide Annual by 12) $70,833 
2 Months Expenses (Divide Annual by 6) $141,666  
3 Months Expenses (Divide Annual by 4) $212,499  


Your accounts receivable, debtors or what clients owe you is effectively tomorrows cash flow.  Predicting when exactly tomorrows cash becomes todays cash can be challenging if we do not keep an active eye on what your clients owe you.

One way of keeping track of your debtors is by measuring and monitoring your average Debtor Days.  Debtor Days is a measure of how quickly cash is being collected from your clients.  The longer they take to pay the higher the debtor days.

For example, a firm with an annual turnover of $1M has payment terms of 7 days from date of invoice.  Currently the firm has debtors of $35,000:

ExampleYour Firm
Debtors / Accounts Receivables $35,000  
Divided by:    
Income for the last 12 Months $1,000,000 
Multiplied by:    
Number of Days in the year 365 Days 365 Days
Debtor Days13 DaysDays
Firms Payment Terms 7 Days Days
Average Days Late6 DaysDays

A $35,000 debtor balance on a $1M turnover looks pretty good on the surface.  However, when we calculate the firms debtor days we notice that on average a client pays the firm 13 days from date of invoice.  Given the firm has 7 day terms, clients on average are paying 6 days late. 

By tracking your debtor days, you get an early warning of a potential cash flow problem.  It can also be a warning of your debtor follow-up procedures not being followed.

How late are your clients paying you?


What is owed to your suppliers is promised cash.  One way of keeping track of your promised cash or creditors is by measuring and monitoring your average Creditor Days.  Creditor Days are measures how quickly cash you pay your suppliers.  The longer you take to pay the higher the creditor days.

For example, the firm has $200,000 in expenses, after removing staff remunerations costs.  Currently suppliers are owed $10,000.

ExampleYour Firm
Creditors / Accounts Payables $10,000  
Divided by:    
Expenses excluding Staff Remuneration $200,000 
Multiplied by:    
Number of Days in the year 365 Days 365 Days
18 DaysDays

As most of your suppliers are likely to have payment terms of 30 days or less, your outstanding supplier commitments should be less than one month’s expenses.  If not, it is a sign that your business is under cash flow stress.

Are your creditors under control?

For a business cash is like air.  Without it, it’s impossible to survive. Which is why all business owners need to understand their businesses cash requirements for today, tomorrow and the future.  Otherwise you risk suffocation.