In order to assess your cash needs accurately you need to use accurate, up-to-date figures or, when these are not available, use forecast figures.
You can avoid overtrading by checking your cash needs using financial tests such as gearing, working capital or the quick ratio tests. See the page in this guide on assessing your cash needs: assets and liabilities.
Two other useful comparisons are debtor days ratio and creditor days ratio.
Debtor days ratio
This shows how long, on average, your customers take to pay you. For example, your customers owe you £14,000 on a given date. Your annual turnover is £100,000. Multiply the amount owed by the days in the year, 365, and divide the result by the annual turnover, £100,000:
(£14,000 x 365)/£100,000 = 51 days
So each customer is taking 51 days, on average, to pay. Remember this calculation can be distorted if your business is very seasonal, so it works best if your invoices are spread evenly throughout the year.
Creditor days ratio
This shows how long, on average, you are taking to pay your suppliers. For example, you owe your suppliers £9,000 on a given date and across the year you pay out £150,000. Multiply £9,000 by the days in the year, 365, and divide the result by the total amount you pay:
(£9,000 x 365)/£150,000 = 22 days
Suppliers are, on average, being paid in 22 days. Again, seasonal differences can influence the results so this calculation works best when your purchases are made evenly during the year.
If you pay your creditors more rapidly than you are paid by your customers, you will need a high level of working capital.