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Critical KPIs to monitor your cash
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Critical KPIs to monitor your cash
27/07/2023.
Cash flow ratios are particularly important for the financial analysis of the business.
Cash flow ratios are particularly important for the financial analysis of the business.
Below are some useful ratios for use in monitoring cash management and working capital:
Current ratio – a measure of liquidity and measures a company’s ability to meet its short-term obligations i.e., amounts due less than 1 year. This should be positive albeit what is ‘good’ will vary depending on the industry.
Current assets/current liabilities
Debtor days – the number of days it takes on average for customers to pay you.
Trade debtors/sales*365
Creditor days – the number of days it takes for you to pay your suppliers on average.
Trade creditors/purchases*365
Stock days – the number of days on average that stock is held before it is sold.
Stock/purchases*365
Stock turnover – the number of times the business has sold and replenished stock in a given period.
Purchases/stock
Working capital cycle – the number of days to complete a cycle from paying suppliers to receiving cash on a sale. Ideally, this should be as short as possible to ensure cash is constantly coming back into the business in a timely fashion to reinvest.
Stock days + debtor days – creditor days
Cash burn rate – this is a measure of how fast a company spends its supply of cash over a specified period of a team (typically monthly). Too fast and you risk running out of money, but too slow and you may be missing out on investment opportunities.
Total change in cash position/specified time period
These ratios in and of themselves provide a useful basis for comparison against contractual terms with customers and suppliers, as well as to review against previous performance to allow for action to address issues as and when they arise and communicate these throughout the organisation. It is also useful to compare yourself to others in your industry and benchmark yourself as a business according to best practice. Please let us know if this is something that interests you.
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