What are the key cash flow metrics and ratios to monitor?

1 Operating cash flow

Operating cash flow (OCF) is the amount of cash generated by your core business activities, such as selling products or services, paying suppliers, and covering wages. It excludes cash from financing or investing activities, such as borrowing, repaying, or buying assets. OCF shows how well your business can generate cash from its operations, and how sustainable and profitable your business model is. A positive OCF means you have enough cash to cover your operating expenses and invest in growth. A negative OCF means you are spending more than you are earning, and may need to raise funds or cut costs.

2 Free cash flow

Free cash flow (FCF) is the amount of cash left over after deducting capital expenditures (CAPEX) from OCF. CAPEX are the cash outflows for buying or upgrading long-term assets, such as equipment, machinery, or property. FCF shows how much cash your business can use for discretionary purposes, such as paying dividends, reducing debt, or acquiring other businesses. A positive FCF means you have excess cash to reward shareholders or pursue growth opportunities. A negative FCF means you are investing more than you are generating, and may need to improve your OCF or reduce your CAPEX.

3 Cash conversion cycle

Cash conversion cycle (CCC) is the number of days it takes for your business to convert its inventory and receivables into cash, minus the number of days it takes to pay its payables. It measures how efficiently your business manages its working capital, and how quickly it can turn its sales into cash. A shorter CCC means you have a faster cash flow cycle, and can free up more cash for other uses. A longer CCC means you have a slower cash flow cycle, and may face cash flow problems or liquidity risks.

4 Cash flow margin

Cash flow margin (CFM) is the ratio of OCF to revenue. It measures how much cash your business generates for every dollar of sales, and how profitable your business is in terms of cash flow. A higher CFM means you have a higher cash flow profitability, and can retain more cash for growth or dividends. A lower CFM means you have a lower cash flow profitability, and may struggle to meet your financial obligations or invest in growth.

5 Debt service coverage ratio

Debt service coverage ratio (DSCR) is the ratio of OCF to debt service. Debt service is the sum of principal and interest payments on your debt obligations. It measures how well your business can cover its debt payments with its cash flow, and how solvent your business is. A higher DSCR means you have a higher ability to repay your debt, and can access more financing options or negotiate better terms. A lower DSCR means you have a lower ability to repay your debt, and may face default or bankruptcy risks.

6 Cash flow forecast

Cash flow forecast is a projection of your future cash inflows and outflows, based on your historical data, assumptions, and scenarios. It helps you plan your cash flow needs, identify potential gaps or surpluses, and adjust your strategies accordingly. A realistic and accurate cash flow forecast can help you avoid cash flow crises, optimize your cash flow performance, and seize opportunities for growth.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?