As business complexity grows, cash flow metrics become increasingly important financial indicators to help you track where your money is going.
Cashflow statements are critical for entrepreneurs looking for insights into the sources and uses of funds in their businesses. The right cash flow metrics can help improve the accuracy of forecasting cash flow items and enhance business efficiency. These metrics not only show the cash flow and the changes in cash position within a period, but they also can be useful KPIs to help you understand the flow of finances in your business and make requisite adjustments.
Managing your business’s growth and sustainability requires transparency on how cash moves through your business. Let’s explore the cash flow metrics you should use for your business and why measuring cash flow is essential.
Why is it Important to Measure Cash Flow?
Cash flow is a vital financial indicator that helps you measure your business’s ability to generate cash in the short term and meet its long-term obligations. Carefully managing money is especially important for small businesses with resource constraints.
Cash flow metrics provide information about earnings, payments, and investments during each period. This information is critical for planning, forecasting, and evaluating financial performance.
Cash flow metrics offer insights into how well your company collects revenue and manages its expenses and can help you identify ways to cut costs and even improve the bottom line.
Tracking exactly how much money is coming in and going out can help you identify gaps that require attention or unexpected expenses that come up. You can also use information from historical trends to forecast future activity.
7 Essential Cash Flow Metrics You Should Track
There are many elements within a cash flow statement that require examination and tracking. Let’s look at the seven key cash flow metrics crucial for the success of your business.
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Operating Cash Flow
Operational cash flow is the money your business generates and consumes from its everyday operations. The cash flow metric indicates the ability of your business to produce resources for maintaining and growing the enterprise. It’s possible to operate with negative cash flow for a time, especially if you have external financing, but most businesses require a clear path to positive operating cashflows.
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Working Capital
Working capital is the money necessary to keep your operations running. It’s the year’s difference between your current assets…
- Cash
- Inventories
- Receivables
…and current liabilities:
- Prepayments
- Wages
- Taxes
- Payables
An adequate level of working capital lets you settle your bills and invest for sustainable business growth.
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Accounts Receivable Turnover
This metric or ratio indicates the business’ efficiency in managing the credit extended to customers by indicating how long the business takes to make collections. This cash flow metric shows how often you collect your average accounts receivable balance in a financial year.
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Accounts Payable Turnover
Accounts payable turnover is a cash flow metric that measures the efficiency of paying suppliers and creditors. It evaluates the average number of times you pay these creditors within a certain period and is most valuable when comparing from period to period. Your ability to pay your creditors on time helps you build valuable business partnerships, improve your liquidity, avoid late payment fees, and get better credit terms in the future.
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Forecast Variance
At the start of the year, most businesses make forecasts of revenues, expenses, and profits. The forecast variance indicates the difference between forecasts of cash flow items and the actual results. Favorable variances indicate you surpassed your forecasts, a solid business performance.
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Cashflow from Operations
Operational cashflow metrics showcase the amount of cash your enterprise generated from its operating activities over the period under review. Operating activities are the services you provide or products you ship and are the firm’s core functions. They typically exclude financing activities or revenue generated through passive means.
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Free Cash Flow
Free cash flow is a cash flow metric representing the cash you have left over after settling capital expenditures and operating expenses. The firm’s ability to generate more free cash flows allows it more resources to pay its debt, pay returns to investors, and finance business growth.
Need Help Tracking the Right Cashflow Metrics?
Tracking your cash flow metrics helps you get all the critical information impacting your business. The right cash flow metrics can help you better understand the health of your business and avoid some common mistakes small businesses make when funding their operations.
The right accounting experts can ensure you get more insights into the performance of your enterprise and make informed decisions. Founder’s CPAs are here to help.
We know how vital accurate cash flow tracking is for our clients and can help create systems that ensure accurate reporting of real-time, critical financial metrics.
Our team of experts is here to provide our clients with the best accounting solutions so they can focus on their businesses. Contact us today to get started!
