Good Morning Kiss from a Cash Flow KPI

Cash Flow KPI

Imagine: Monday morning. You jump out of bed. Full of Energy and Bushy-Tailed. Punching the Air. Because your Cash Flow KPI is >1!

Coffee is optional at this point :)

Despite social media hype, constantly changing market conditions and demanding customers.

Cash Flow is remains the undisputed King.

1. Fundamentals

The good News:

  1. This Cash Flow KPI is easy to implement
  2. You need not be a qualified accountant

A very useful Cash Flow KPI is Working Capital.

2. What is Working Capital?

The amount of Net Cash in your business:

   

 

3. WC Ratio is the KPI measure 

The Working Capital Ratio is Assets over Liabilities. In this example it is 1.09 :

   

A WC Ratio of 1.0 or greater is considered acceptable for most businesses. A high WC Ratio (greater than 2.0) indicates a financially healthy position. Perhaps ready for expansion or a long holiday at Malibu. A low WC Ratio (less than 1.0) indicates difficulties to meet short-term financial obligations, and the inability to take advantage of opportunities requiring quick cash.

Furthermore a low WC may flag a potential bankruptcy risk due to low income expectations.

Conclusion

The WC Ratio is an excellent Cash Flow KPI to provide an initial assessment of your own or someone else Cash Flow position. It also might assist in checking potential businesses acquisition quickly without requiring costly accounting expertise.

However, one needs to consider a number of other factors to gain a comprehensive overview of any Cash Flow position. Other factors need to be kept in mind such as the duration of liquidating assets (eg inventories) into real cash.

 

About Markus Schwarzer, I work with SMEs on reviewing, designing and implementing KPIs for Financial Dashboards.

 


 


 


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