12 metrics and KPIs for cash flow management

12 Metrics and KPIs for cash flow management

For cash flow management, there are several metrics and KPIs which you can track. Use the ones that are meaningful to you and your business, to give you useful insights to help you manage your cash flow and grow your business. 

We have highlighted some of the commonly used metrics and KPIs below. Click on the links to find out what each one is, how to calculate it and when or why you might use it. First, however, you may want to understand the difference between metrics and KPIs, why different terminology exists or what the difference is between cumulative, average and point in time measures. If so, start by reading about metrics versus KPIs. 

Metrics versus KPIs 

Financial data from your profit and loss report, your balance sheet and cash flow statement is useful for tracking the status of your business whereas KPIs (key performance or predictive indicators) are useful for measuring the health of your business and how effective you are at achieving your objectives. 

KPIs report the variance between actual metrics and a target. 

The human brain processes images 60,000 times faster than text. It is therefore useful to present data visually. Metrics can be plotted graphically for trend analysis, whilst KPIs can also be plotted using traffic lights and dials or gauges.  

Terminology 

Different sectors and businesses will have different goals and therefore different targets. Consequently, different organisations will use slightly different KPIs and may give them slightly different names to reflect their business sector and internal terminology. 

The important thing is that you measure what matters and use terminology that is understood by your team. 

1. Operating Cash Flow 

Operating cash flow is a measure of the amount of cash that a company generates through its normal or core business activitiesWithout a positive cash flow a company cannot remain solvent in the long run. 

There are two ways of calculating operating cash flowthe direct method which is simpler and the indirect. 

The direct method calculates the difference between actual cash inflows from revenues and cash outflows from operating expenses. 

Operating Cash Flow (direct method) = Total Revenue – Operating Expenses 

The indirect method takes into consideration changes in non-cash accounts e.g. depreciation, taxes and changes in working capital. 

Operating Cash Flow (indirect method) = Operating Income (revenue – cost of sales) + Depreciation – Taxes +/- Change in Working Capital 

Operating cash flow relates to core business activities and does not take into account secondary activities i.e. investing and financing activities. Cash flow from investing and finance activities are the other two elements of a cash flow statement. 

A cash flow statement will show: 

  • Cash From Operating Activities 
  • Cash From Investing Activities 
  • Cash From Financing Activities 

The net change in cash should reconcile with the cash balances reported in your balance sheet.  

Net Change In Cash = Cash From Operating Activities +/- Cash From Investing Activities +/- Cash From Financing Activities 

2. Working Capital 

At any given time, your working capital can be calculated from your balance sheet. It is the sum of your current assets less your current liabilities and is the amount of money you need to run your business. 

Working Capital = Current Assets – Current Liabilities 

3. Forecast Variance 

A forecast variance in relation to revenue may be referred to as actuals versus forecast, whilst for expenses it is often referred to as budget versus actuals. Variances help you to understand where your business went off track e.g. sales or operating expenses. If variances are calculated and reviewed by a particular line of business or project, then it will also help you to identify which parts of your business are performing better or worse than expected. Analysing this will help you to improve your forecasts and focus on finding ways to improve your business performance. 

Forecast Variance = Forecasted Value – Actual Value / Forecasted Value 

4. Debtor Days (or Days Sales Outstanding) 

Debtors Days refers to the average number of days required for a company to receive payment from its customers for invoices issued to them. The shorter it is, the better it is for cash flow. If it increases, then this could mean there is a greater risk of defaults and may indicate a potential cash flow problem. 

Debtor Days (also referred to as Days Sales Outstanding) is calculated as follows:

Debtor Days = Total Debtors in a period / Total Credit Sales for that period *365 

5. Creditor Days (or Days Payables Outstanding) 

Creditor Days refers to the average number of days a company takes to pay its suppliers. The longer it is, the better it is for cash flow as the business holds on to its cash for longer. 

Creditor Days (also referred to as Days Payables Outstanding) is calculated as follows: 

Creditor Days = Total Creditors in a period / Total Credit Purchases for that period *365 

Cash-based businesses will have much lower creditor days than non-cash businesses. In general, your creditor days should closely match your average supplier payment terms, so that you are pay off your liabilities in time but not too early or too late. 

6. Accounts Receivable Turnover (or Debtors Turnover Ratio) 

Accounts receivable is the money owed to a company by its debtors (i.e. customers/clients). The accounts receivable turnover shows the rate at which your customers pay you. If customers start taking longer to pay, then the ratio will get smaller indicating that there may be a potential problem e.g. customers are not happy or there is a problem with delivery.  

Accounts Receivable Turnover = Total Sales for period / Average Accounts Receivable for that period 

Reviewing how this KPI changes over time will help you to spot potential cash flow problems and customer relationship issues. 

7. Accounts Payable Turnover (or Creditors Turnover Ratio) 

Accounts payable is the money a company owes to its creditors (i.e. suppliers/vendors). The accounts payable turnover shows the rate at which you pay off suppliers. If you pay off suppliers more slowly, then the ratio will get smaller indicating that there may be a potential problem in paying off suppliers which may in turn affect your relationship with your suppliers. 

Accounts Payable Turnover = Total Cost of Sales for period / Average Accounts Payable for that period 

The period used is often a month, but it could be a quarter or a year. Reviewing how this KPI changes over time will help you to spot potential supply chain issues. 

8. Liquidity Ratio – Operating Cash Flow Ratio 

Liquidity ratios indicate how well a company is able to pay off its outstanding short-term debts. 

For example, your operating cash flow ratio indicates the number of times that you can pay off your current debts with cash generated from your business. 

Operating Cash Flow Ratio = Cash Flow From Operations / Current Liabilities 

9. Liquidity Ratio – Current Ratio 

The difference between the operating cash flow ratio and the current ratio is that the operating cash flow ratio assumes that cash flow from operations will be used to pay off current liabilities whereas the current ratio assumes that current assets will be used.  

Current Ratio = Current Assets / Current Liabilities 

10. Liquidity Ratio – Quick Ratio (or Acid-Test Ratio) 

The difference between the current ratio and the quick ratio (also referred to as the acid-test ratio) is that the quick ratio assumes that the company’s liabilities will be paid off only with its most liquid assets and therefore excludes inventories (i.e. stock).  

Quick Ratio = (Current Assets – Inventory) / Current Liabilities 

The ideal quick ratio is around 1:1. This means you have just enough current assets to cover your current liabilities. A higher ratio is safer than a lower one because you have excess cash. 

Falling liquidity ratios may indicate a liquidity and cash flow problem. 

11. Debt to Equity Ratio 

Your debt to equity ratio indicates how your business is funded. A low ratio indicates that funding is from equity via shareholders whilst a high ratio indicates that it is from finance i.e. borrowing money.  

When a business uses debt as its main source of financing, it is considered highly leveraged. If it’s highly leveraged, the debt to equity ratio tends to be higher. 

Your debt to equity ratio is of particular interest to your shareholders and potential investors as it indicates how risky it is to invest in your business. The higher the debt to equity ratio, the riskier the investment. 

Debt to Equity Ratio = Total Debt / Shareholders’ Equity 

A higher debt to equity ratio may be of less concern when a business is stable and growing but worrying if a business is in decline or hits a crisis.  

12. Return on Equity (or Return on Investment) 

Return on equity measures the percentage rate of return that the shareholders receive on their investment. Effective cash flow management optimises working capital, which in turn can be utilised effectively to grow your business and drive higher ROWE. Conversely, poor cash flow management may lead to lower ROE. 

Return on Equity = Total Net Income for period / Average Accounts Payable for that period 

Visual dashboards for cash flow metrics and KPIs 

A visual dashboard will help you to evaluate and draw insights from your financial data. Use this to help you plan and forecast, model and test different scenarios, and make business decisions.  

If possible, link your dashboards to the underlying reports so that you can delve into the data to find out what’s contributing to good or bad performance. Regularly review the data to stay on top of cash flow management, and to help you make business decisions. 

Download our metrics and KPIs checklist on the right hand side to understand what good looks like for cash flow metrics and KPIs.

The important thing is to measure what matters to your business. 

What good looks like will be determined by the industry your business is in, the stage of growth of your business, and your business goals. 

There are some industry standards and benchmarks that you can compare your business against, but if you are unsure which metrics and KPIs to use or you don’t know how to evaluate them, then seek the advice of an experienced accountant or business advisor. 

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Delia Porter, MD and Founder

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