How to tell whether sales are turning into cash
Follow the same set of won deals through invoicing and payment. Dividing this month's receipts by this month's sales can mix different customers and periods.
By Manny Sidhu · Practical guide
Choose a group of deals and a cut-off date
Start with a defined group, such as deals won in April, and an observation date, such as 30 June. Keep those deals together as you inspect invoicing and payments. This is a sales cohort: a fixed set of sales followed over time.
State whether values include tax and which currency you are using. If some records cannot be matched reliably, show their count and value separately. Do not count an unknown payment status as an unpaid invoice without evidence.
An example with two different ratios
Illustrative example, not customer data: an April cohort contains A$100,000 of won deals. By 30 June, A$80,000 has been invoiced and A$60,000 has been collected against those invoices. Assume reliable matching, AUD amounts excluding tax, and no credits or refunds.
Cash collected divided by won deal value is A$60,000 / A$100,000 = 60%. Cash collected divided by invoiced value is A$60,000 / A$80,000 = 75%. These ratios answer different questions, so label the denominator. They are illustrative measures, not a statement of AirCEO's production formula or of the accounting cash conversion cycle.
The A$20,000 invoiced but not collected is a different issue from the A$20,000 not yet invoiced. Neither amount is automatically late. You need the agreed billing schedule, invoice due dates, and payment terms to determine that.
Find where the delay starts
Separate close-to-invoice time from invoice-to-payment time. A billing delay can require a different operational response from a payment that is overdue. Check whether a small number of large customers explains the movement.
Compare cohorts at the same age. An April cohort observed after 90 days has had more time to collect than a June cohort observed after 30 days. Comparing them without that caveat can make normal timing look like deterioration.
Show the evidence behind the change
A useful collection explanation includes the deal group, observation date, linked invoices and payments, unmatched records, and the calculation. If the definition changes, make that change visible before comparing the results.
AirCEO's Executive Signal connects material sales and financial changes to their evidence. Use the receipts to inspect the scope and method behind a particular output rather than assuming that similarly named metrics use identical formulas.