Businesses need to keep track of their cash flow to ensure that they have enough funds to operate smoothly. Cash flow is the amount of money that comes in and goes out of a business during a specific period. It is important to monitor cash flow regularly to identify potential issues and make informed decisions.
To help businesses manage their cash flow effectively, there are several key performance indicators (KPIs) that they can track. These KPIs provide insights into how well a business is performing financially and can help identify areas for improvement. In this article, we will explore the top 10 cash flow KPI’s that businesses should be monitoring to ensure their financial success. From days sales outstanding (DSO) to cash conversion cycle (CCC), each KPI provides a unique perspective on a company’s cash flow and can help businesses make informed decisions about their financial future.
Operating Cash Flow
Operating cash flow is a measure of how much cash a business has generated or used in its core operations during a specific period. It is calculated by subtracting operating expenses from operating revenues. Operating cash flow is a crucial metric for businesses because it reflects the company’s ability to generate cash from its core operations.
Operating Cash Flow to Current Liabilities Ratio
The operating cash flow to current liabilities ratio is a measure of a company’s ability to pay off its current liabilities using its operating cash flow. It is calculated by dividing operating cash flow by current liabilities. A ratio of less than one indicates that a company may have difficulty meeting its short-term obligations using its operating cash flow.
Cash Flow to Net Income
The cash flow to net income ratio is a measure of how much cash a company generates relative to its net income. It is calculated by dividing operating cash flow by net income. A ratio of less than one indicates that a company may be generating less cash than its net income suggests.
Cash Flow Per Share
Cash flow per share is a measure of how much cash a company generates per share of its stock. It is calculated by dividing operating cash flow by the number of outstanding shares. Cash flow per share can be used to compare companies with different numbers of outstanding shares.
Cash Conversion Cycle
The cash conversion cycle is a measure of how long it takes a company to convert its investments in inventory and receivables into cash. It is calculated by adding the number of days it takes to sell inventory to the number of days it takes to collect receivables and subtracting the number of days it takes to pay suppliers. A shorter cash conversion cycle indicates that a company is more efficient at converting its investments into cash.
Cash Debt Service Coverage Ratio
The cash debt service coverage ratio is a measure of a company’s ability to service its debt using its operating cash flow. It is calculated by dividing operating cash flow by total debt service. A ratio of less than one indicates that a company may have difficulty servicing its debt using its operating cash flow.
Free Cash Flow (FCF)
Free cash flow is a measure of how much cash a company generates after accounting for capital expenditures. It is calculated by subtracting capital expenditures from operating cash flow. Free cash flow can be used to determine a company’s ability to invest in new projects or return cash to shareholders.
Overall, operating cash flow is a crucial metric for businesses to monitor, and the above-mentioned KPIs can help companies evaluate their cash flow performance and make informed decisions about their operations and investments.
Cash Flow to Investors
When it comes to measuring cash flow to investors, there are two key performance indicators that businesses should focus on: Cash Flow Return on Assets (CFROA) and Cash Flow Return on Investment (CFROI).
Cash Flow Return on Assets (CFROA)
CFROA is a measure of how much cash is generated by a company’s assets. It is calculated by dividing operating cash flow by total assets. This KPI is important because it helps investors understand how efficiently a company is using its assets to generate cash.
A high CFROA indicates that a company is generating a lot of cash relative to its assets, which is a positive sign for investors. On the other hand, a low CFROA may indicate that a company is not using its assets efficiently, which could be a red flag for investors.
Cash Flow Return on Investment (CFROI)
CFROI is a measure of how much cash is generated by a company’s investments. It is calculated by dividing operating cash flow by invested capital. Invested capital includes all the money that a company has invested in its operations, such as property, plant, and equipment.
CFROI is important because it helps investors understand how much cash a company is generating from its investments. A high CFROI indicates that a company is generating a lot of cash relative to its investments, which is a positive sign for investors. On the other hand, a low CFROI may indicate that a company is not generating enough cash from its investments, which could be a red flag for investors.
In conclusion, measuring cash flow to investors is crucial for businesses and investors alike. By focusing on CFROA and CFROI, businesses can better understand how efficiently they are generating cash from their assets and investments, respectively. This information can then be used to make informed decisions about future investments and operations.
