Managing cash flow is one of the most important aspects of running a successful business. A study by U.S. Bank found that 82% of small businesses fail because of poor cash flow management. Understanding your cash flow metrics allows you to observe how money flows into and out of your firm, helping you to make more informed financial decisions. Cash flow management KPIs (Key Performance Indicators) give you clear insights into your business’s economic health.
Here are 15 important cash flow metrics to help you monitor and optimize your company’s cash flow. These cash flow KPIs will provide you with a better understanding of your business’s ability to cover expenses, grow, and generate profits.
1. Operating Cash Flow (OCF)
Operating cash flow is one of the most important cash flow metrics for any business. It measures the cash generated from regular operations, excluding financing or investment activities. This provides a clear picture of how well your daily operations are performing in terms of cash generation.
By tracking operating cash flow margin, you can assess whether your business can sustain operations without needing additional external financing. A positive operating cash flow margin is a good sign of a business’s financial health.
Formula:
OCF = Net Income + Non-Cash Expenses + Changes in Working Capital
2. Free Cash Flow (FCF)
Free cash flow is a crucial cash flow metric that shows how much cash is left after paying for capital expenditures, like buying equipment or real estate. This figure indicates how much cash is available for growth initiatives, debt repayment, or shareholder dividends.
A positive free cash flow is a strong indicator that your business has the liquidity to reinvest in itself and remain sustainable in the long term.
Formula:
FCF = Cash Flow from Operations − Capital Expenditures
3. Cash Flow from Investing Activities
This metric tracks cash inflows and outflows related to investments, such as purchasing assets or making long-term investments. It is essential to understand how your investments are contributing to or draining cash.
Monitoring cash flow management KPIs like this helps you evaluate whether your investments are paying off and driving your business growth.
Formula:
Cash Flow from Investing Activities = Cash Inflows from Investments − Cash Outflows for Investments
4. Cash Flow from Financing Activities
Cash flow from financing activities includes cash flows resulting from your financing decisions, such as taking out loans or issuing stock. It shows how dependent your business is on external funding sources.
Understanding cash flow KPIs related to financing activities helps assess the risk level of your business and how well you’re managing debt.
Formula:
Cash Flow from Financing Activities = Cash Inflows from Financing − Cash Outflows for Financing
5. Days Payable Outstanding (DPO)
DPO is an important cash flow metric that measures the average time it takes for your business to pay its suppliers. A high DPO means you are holding onto cash longer, which can be beneficial for improving liquidity.
However, cash flow management KPIs related to DPO should also be balanced with supplier relationships to avoid damaging trust.
Formula:
DPO = (Accounts Payable × Number of Days) / Cost of Goods Sold
Cost of Goods Sold = Beginning Inventory + Purchases − Closing Inventory
6. Accounts Receivable Turnover (ART)
ART measures how efficiently a business collects money from customers, turning accounts receivable into cash. This metric is crucial for understanding your ability to convert sales into actual cash quickly.
High accounts receivable turnover is a positive indicator of efficient cash flow management.
Formula:
ART = Total Credit Sales / Average Accounts Receivables
7. Accounts Payable Turnover (APT)
APT shows how frequently your business pays its suppliers. A high APT could indicate that you’re paying suppliers too quickly, potentially reducing cash flow available for other needs. A well-balanced APT ensures you maintain good relationships with suppliers while managing your cash flow.
Formula:
APT = Total Credit Purchases / [(Starting Accounts Payable + Ending Accounts Payable) / 2]
8. Operating Cash Flow Ratio
The operating cash flow ratio is a cash flow KPI that compares your operating cash flow to your current liabilities. It measures the ability of your business to meet short-term obligations using cash generated from core operations.
A higher ratio indicates better cash flow efficiency and improved liquidity, making it easier to pay off debts and expenses.
Formula:
Operating Cash Flow Ratio = Operating Cash Flow / Current Liabilities
9. Net Cash Flow
Net cash flow is the difference between the total cash inflows and cash outflows for a given period. This metric provides a clear indication of whether your business is growing its cash reserves or facing potential cash shortages.
Formula:
Net Cash Flow = Total Cash Inflows − Total Cash Outflows
10. Cash Flow to Debt Ratio
This ratio compares your operating cash flow to your total debt, helping you determine how easily your business can service its debt with cash from operations. A higher ratio indicates a healthier cash flow management position.
A strong cash flow to debt ratio means your business is less reliant on debt and better positioned to handle financial obligations.
Formula:
Cash Flow to Debt Ratio = Operating Cash Flow / Total Debt
11. Cash Conversion Cycle (CCC)
The cash conversion cycle measures how many days it takes for your business to turn its investments in inventory and other assets into cash. This is a crucial cash flow efficiency metric for understanding the time it takes to recoup cash from operations.
A lower CCC indicates better cash flow efficiency, as it shows the company collects cash faster and reinvests it into operations sooner.
Formula:
Cash Conversion Cycle = Days Inventory Outstanding + DSO − DPO
12. Cash Flow Efficiency
Cash flow efficiency tracks how well your business turns profits into actual cash. It helps you determine whether your business can generate enough cash flow to fund growth without relying on external funding sources.
The higher the cash flow efficiency, the better your company is at converting revenue into cash.
Formula:
Cash Flow Efficiency = Operating Cash Flow / Net Income
13. Cash Flow Coverage Ratio
This ratio compares your operating cash flow to your debt payments, both interest and principal. It indicates how well your business can meet its debt obligations without external funding.
A higher ratio suggests greater cash flow management success and stronger solvency.
Formula:
Cash Flow Coverage Ratio = Operating Cash Flow / Debt Payments (Interest + Principal)
14. Days Sales Outstanding (DSO)
DSO measures how long it takes for your business to collect payments from credit sales. Reducing DSO can significantly improve cash flow efficiency and ensure your business collects cash faster.
Formula:
DSO = (Average Receivables / Total Credit Sales) × Number of Days
15. Working Capital
Working capital is the difference between current assets and current liabilities. Although not a direct cash flow metric, it’s essential for understanding your ability to cover short-term expenses with cash.
Maintaining healthy working capital ensures liquidity and supports daily operations.
Formula:
Working Capital = Current Assets − Current Liabilities
By regularly tracking your cash flow metrics and KPIs, you can improve cash flow management and ensure your business’s financial health. These 15 metrics provide valuable insights to help you optimize your operations, reduce financial risks, and make better decisions that support sustainable growth.