Free tool · Working capital
Cash gap calculator
The short answer
Cash tied up in receivables equals your daily sales times your DSO. A $6MM-a-year business collecting in 52 days has about $855K sitting in unpaid invoices, and 2% monthly growth adds roughly $230K more within a year. An 85% factoring advance would release most of that now, which works like cutting DSO from 52 days to about 8.
At $500,000 a month and 52 days to get paid, about $854,795 of your money is sitting in customers’ accounts payable. Growing 2% a month pulls in another $229,292 over the next year. Growth eats cash before it produces it.
The DSO-reduction equivalent
Getting 85% up front works like cutting DSO by about 44 days, from 52 to roughly 8, without asking a single customer to pay faster. The remaining 15% arrives, less fees, when they pay.
Estimates only. Cost assumes the fee accrues in proportion to days outstanding (2% per 30 days × 52 days) on all monthly sales; at month 12 it would be about $21,983 a month. Actual advance rates and fees depend on your customers’ credit and the funder.
How do you calculate the cash tied up in accounts receivable?
Multiply your average daily sales by your days sales outstanding (DSO). Daily sales are annual revenue divided by 365. A business billing $500K a month sells about $16,400 a day. If it takes 52 days to collect, roughly $855K is sitting in receivables at any moment.
If you only know your payment terms, add the days customers typically run late. Net-45 terms with customers paying a week late means a DSO near 52. Real DSO is almost always longer than the terms on the invoice.
Why does growth make the cash gap worse?
Every new dollar of sales creates a new dollar of receivables before it creates a dollar of cash. You pay for labor and materials now and collect weeks later. The faster you grow, the more cash disappears into AR, even when the business is profitable on paper.
At 2% monthly growth, revenue climbs about 27% in a year, and your AR balance climbs with it. A bank line sized to last year’s numbers rarely keeps up. That is the classic growth outpacing credit problem, and it is often worse when customers pay in 60 to 90 days.
What is the DSO-reduction equivalent of factoring?
An advance of X% works like cutting DSO by X% of its current length. If you collect in 52 days and a funder advances 85% on invoice day, you only wait for the last 15%. In cash terms that feels like a DSO of about 8 days. The difference is that you get there without pressuring customers for faster payment or offering early-pay discounts.
Advance rates commonly run 70% to 90% depending on industry and customer credit. Factoring fees commonly run roughly 1% to 5% of invoice value per 30 days. Compare that cost to the alternatives in factoring vs. a line of credit and invoice factoring rates explained.
What this calculator assumes
The model uses the standard working-capital identity: AR equals daily sales times DSO. It grows revenue at your monthly rate and holds DSO constant. Monthly cost assumes every invoice is factored and the fee accrues in proportion to days outstanding.
- AR at month m: monthly revenue × (1 + growth)^m × 12 ÷ 365 × DSO.
- Cash released: AR × advance rate.
- Monthly cost: monthly revenue × fee per 30 days × (DSO ÷ 30).
- Cost as % of gross profit: monthly cost ÷ (monthly revenue × gross margin).
Questions people ask
What is a good DSO?
It depends on your industry and terms. A DSO within about 10 to 15 days of your stated terms usually means collections are working. A DSO far beyond your terms points to slow-paying customers or billing problems worth fixing whether or not you factor.
Do I have to factor all my invoices?
Not always. Spot factoring lets you sell selected invoices, while whole-ledger facilities fund all eligible receivables, usually at better pricing. Our guide to spot factoring vs. whole-ledger compares the two.
How much would an 85% advance release for my business?
Roughly 85% of your eligible receivables at the time the facility starts. Ineligible invoices, such as very old ones or those owed by consumers, are excluded. After that, each new invoice is advanced as you bill it.
Is factoring cheaper than a bank line of credit?
Usually not on rate alone. A bank line is typically cheaper when you can get one big enough. Factoring is built for businesses that cannot get a line, have outgrown it, or need funding that scales with sales.
Why use gross margin in a cash gap calculation?
Because the fee comes out of gross profit, not revenue. Seeing factoring cost as a share of gross profit tells you whether the cash is worth it at your margins. A low-margin business needs to watch this closely.
Does growth always increase receivables?
If payment terms and collection speed stay the same, yes. Receivables grow in step with sales. Shortening terms or speeding collections can offset part of it, but rarely all.
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