Question

Hi how do we calculate the cash flow gap - I need the formula? br

Answer 1

To calculate the cash flow gap we use the formula-

Cash flow gap = days inventory outstanding + days inventory outstanding - days payable outstanding

Days inventory outstanding = (average inventory/COGS) x days

Days sales outstanding = (average accounts receivable/revenue) x days

Days payable outstanding = (accounts payable/COGS) x days

Here, days means a 365 days or 360 days a year assumption.

It is always advisable to have a lower cash flow gap. A buskness should try to increse it's days payable outstanding and reduce it's days inventory and days sales outstanding.

Do let me know in the comment section in case of any doubt.