Cashflow Oxygen – make sure your business can breathe

5 March 2023

Business tips & insights

Why is cashflow important…?

What is cashflow? Read our article here to understand the wonders of managing your cashflow. In summary, managing cashflow is one of the most essential parts of any business. In fact, failure to adequately manage cashflow and finances is a lead indicator of why Sole Trading and Micro businesses become insolvent. The Australian Bureau of Statistics (ABS) estimates that 40% of Australian Businesses fail in their first five years of trading due to failures in financial management (namely cashflow)

The below oxygen calculator (to make sure your cashflow is taking healthy breaths) helps work out your available cash flows to make sure your business stays afloat. The metrics within this report should be tracked on an ongoing basis (usually recommended to be updated every month).

Please note that this calculator is for guidance only, Sole always encourages the use of advisors to make financial decisions as your personal circumstances may differ.

Days of Oxygen – This Month

DOO – Days of Oxygen – is a measure of how much breathing space you have if revenue drops or ceases.
For start-ups and early-stage companies DOO is your “Runway”, a value that investors want you to always be mindful of.

Cash at Bank

This is the amount of cash you have available for use (where you don’t need to repay anything such as a credit card or term depository)

Trading Accounts Receivable

All your open invoices (i.e. sales revenue that does not include interest, grants, saleable assets, etc.)

Work In Progress

Work that you will realistically expect to invoice in the next 30 days

Cost of goods and/or cost of sales

Costs that you will need to pay in next 30 days (for goods/services you are selling/rendering)

Trading accounts payable

Any other outstandings, etc.

Operational Expenditure

Fixed costs: Your estimated one month’s (30 days) operating expenses (e.g. rent, internet charges, etc.)

Your Oxygen

Cash available: your “buffer”

Days of Oxygen

Your breathing space or runway

“Best practice” = 120 days DOO
* For added “insurance”, omit or discount, WIP

Forecast – Next month

Do this as a rolling forecast

Forecast revenue for the next 30 days

Contribution factor %

Revenue needed to break even

% Safety margin

$ Safety margin **

** A realistic safety margin should be at least one month’s OpEx

Frequently Asked Questions

What is cash flow and why is it important for small businesses?

Cash flow refers to the movement of money into and out of a business. Managing cash flow effectively helps businesses cover expenses, maintain operations, and avoid financial difficulties.

What does “Days of Oxygen” mean in cash flow management?

Days of Oxygen (DOO) measures how long a business can continue operating if revenue slows down or stops. It provides an indication of the business’s financial runway and stability.

How often should cash flow forecasts be updated?

Cash flow forecasts should ideally be reviewed and updated monthly. Regular updates help business owners identify potential cash shortages and make informed financial decisions.

What is considered a healthy Days of Oxygen target?

The article suggests that a best-practice target is around 120 days of oxygen, providing businesses with a strong financial buffer to handle unexpected challenges.

How can a business improve its cash flow position?

Businesses can improve cash flow by invoicing promptly, following up on unpaid invoices, reducing unnecessary expenses, maintaining cash reserves, and regularly monitoring financial performance.

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