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Use these KPIs to become a cash flow master

cash flow cash management kpis Sep 15, 2022

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I know we talked about KPIs last week, but I heard so much feedback on that edition that I wanted to revisit them again.

82% of businesses that fail say that cash flow problems contributed to their failure.

I don’t know about you, but when I see 82% of any group agreeing my ears perk up.

Now, sure, I do understand that cash flow may not have been the main problem. But cash flow stopped them from solving the main problem.

So, how can you avoid having cash be the issue?

While there are countless KPIs related to cash flow, I’ve identified 5 which I think are the most important.

The idea isn’t that you use all 5 of these. Each works well in different situations, so consider your situation for which is right for you. I’ll dig into each and help you determine that below.

Quick Ratio

(Cash + Accounts Receivable) / Current Liabilities

This ratio shows how quickly companies could meet short-term obligations. It’s really helpful in gauging the short-term strength of the company.

Think about this: Cash can be immediately used to payoff current liabilities (which are things you owe that are due in less than a year) and Accounts Receivable should be received within 30-90 days.

So, if all your current liabilities came due immediately, if cash + receivables is bigger than current liabilities, you could make those payments.

1 or higher is considered good, but it can also be very industry-specific, so check industry averages.

When your ratio is less than 1, you are at risk of stretching yourself too thin and should probably keep more cash in the business.

This ratio is important for almost everyone and is something I like to use when determining how much cash to distribute to owners versus keep in the business.

Cash burn rate

(Cash Balance Beginning of Period – Cash Balance End of Period) / # of Months in Period

This is normally run on a monthly and tells you how many months of cash you have in the bank.

This is most often used by companies that are either unprofitable or have outside investment.

In these situations, it tells you how much cash you are using each month and allows you to calculate what your cash runway is.

Cash Runway = Total Cash Reserve / Burn Rate

This tells you how long (how many weeks/months) before you run out of money.

Understanding your burn rate and runway is important for proper cash planning.

Depending on the situation, reaching a specific runway level could mean you need to:

  • Change your spending habits

  • Start raising more money

  • Wind down the company

If you’re profitable, it will tell you how quickly you’re building your cash reserve, which can help you understand:

  • When to take distributions

  • How long before you can make a specific investment

Cash Conversion Cycle (CCC)

Days of inventory outstanding (DIO) + Days sales outstanding (DSO) - Days payables outstanding (DPO)

Simply, CCC is how long it takes from investment (purchase of inventory) to a collection of revenue (cash in hand).

This metric is often overlooked, but the reality is how quickly you can turn your cash around can determine:

  • how quickly you can grow

  • how quickly you can reinvest in inventory or assets

  • how quickly you can pull money via distributions

I wrote about the CCC in this Twitter thread:

Operating Cash Flow

Net income + non-cash items + changes in working capital

This is from the Statement of Cash Flows and tells you how much cash is being generated by the business operations.

To sustain a business long-term, you need to generate cash from operations.

Ideally, you’re generating enough cash from operations to support business growth:

  • Buying new equipment

  • Buying inventory

This metric is good for helping you identify how long it will take to generate enough cash to reinvest in the company. This is really important (as well as the next metric) in capital-intensive businesses.

If you have to replace your manufacturing equipment every three years, you need to make sure you’re generating enough cash to pay for those big expenses.

When operating cash flow is negative, you potentially have a problem. To continue operating, cash is coming from:

  • Previous cash balances

  • Investing Activities (selling of assets)

  • Financing Activities (taking out loans)

  • Owner funding the business

You need to understand why and how you’re going to fix it. This is where cash burn rate from above is helpful, as well.

Free Cash Flow (FCF)

Operating cash flow – capital expenditures

Operating Cash Flow doesn’t take into account expenses on long-term assets, which is where FCF saves the day.

Free Cash Flow helps you understand how much cash the business is generating AFTER reinvestment.

A high FCF allows you to:

  • pay off debt

  • reinvest in the business

  • pay dividends to the owners

A high FCF is the holy grail of running a company because it gives you flexibility and a consistent flow of cash.


I talk about these 5 KPIs, as well as many more, in my cohort. This is your last week to sign up for the waitlist and get the waitlist discount. Sign up here:

The cohort will run from Oct 17-28. I hope you can join us!




Thank you for reading--see you again next week.

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