Mastering Cash Flow Management through Key Performance Indicators
Introduction
Effective management of cash flow is vital for business stability and growth. Concentrating on key KPIs can illuminate financial standing and inform decision-making.
Quick Ratio
• Objective: Evaluates ability to meet short-term liabilities without selling inventory.
• What It Shows: Your ability to cover immediate bills.
• Simple Calculation:
◦ Add up the cash you have and what customers owe you (Accounts Receivable).
◦ Then, divide that total by the bills you need to pay soon (Current Liabilities).
• Ideal Benchmark: A ratio greater than 1 is typically seen as positive, although industry averages may differ.
Cash Burn Rate
Understanding Cash Sustainability
• What It Measures: How fast you're using up your cash.
• Easy Calculation:
◦ Subtract the cash you have at the end of a period (like a month) from the cash you had at the start.
◦ Divide that difference by the number of months you're looking at.
Cash Conversion Cycle (CCC)
Checking How Fast You Handle Your Money
• What to Look At: How long your products sit before being sold.
◦ How quickly customers pay you.
◦ How long you take to pay your own bills.
• What It Means: If you can sell your products quickly, get paid fast by your customers, and stretch out when you pay your bills without upsetting your suppliers, you're managing your cash well.
• The quicker this happens, the better your business is at handling money.
Operating Cash Flow
• What We Look At: The actual cash your business brought in from selling things or providing services
• Simple Explanation:
◦ Start with how much money the business made.
◦ Add any money that didn't come in as cash, like things you expect to get paid for later.
◦ Adjust for any money that went into or came out from the day-to-day running of the business.
• Why It's Good: If this number is positive, it means your business is earning more cash than it's spending on its regular activities.
Free Cash Flow (FCF)
• What It Tells You: How much cash is left after the business has paid for all its big-ticket items.
• Simple Way to Figure It Out:
◦ Take the cash your business made from its usual work.
◦ Then take away what you spent on big things like equipment or machinery.
• Why It Matters: It shows if there’s enough cash left to use for things like paying off debts, saving for the future, or investing in new projects. If there's cash left over, it's a good sign your business is doing well.
Conclusion
Leveraging these KPIs can lead to enhanced financial clarity and strategic financial planning, essential for guiding a company's growth trajectory
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Disclaimer: The content shared on this blog and in these videos is for informational and educational purposes only. Despite my 30 years of experience as a business owner, I am not a certified financial advisor, accountant, or legal professional. The insights and tips shared are based on personal experiences and should not be taken as professional financial or legal advice. For financial, legal, or professional advice, please consult with a certified professional in the respective field. I disclaim any liability or responsibility for actions taken based on any information found in this blog or these videos.
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