The Importance of Cash Flow Management for Your Business

Cash Flow

The Importance of Cash Flow Management for Your Business small

This week’s blog post was inspired by a recent chat with a business owner, and it's a conversation I have way too often. It went something like this:

Business Owner: “I don’t need management accounts or KPIs. I’ve been doing fine for 10 years without them.”

Me: “How do you manage your cash flow?”

Business Owner: “Simple. I look at the bank balance every day.”

While this business had done fairly well, a lot of its success could be attributed to luck rather than strategic financial management. Relying solely on the cash in the bank today is risky and can lead to a sudden downfall. Imagine how much better they could have done with a proper finance function in place.

Why Bank Balances Aren't Enough

Nobody can successfully manage their business’s cash flow by just looking at their bank balance. Here’s why:

  1. Lack of Forecasting: Without a cash flow forecast, you’re flying blind. Most business owners don’t keep one.
  2. Balance Sheet Ignorance: Understanding what you have versus what you owe is crucial, and this information comes from your balance sheet, which many business owners overlook.

Let’s dive into some essential cash-related KPIs to help you get on top of your cash management. Remember, these should complement, not replace, a cash flow forecast.

Key Cash-Related KPIs

Operating Cash Flow (OCF)

Formula: Operating Cash Flow = Net Income + Non-Cash Expenses + Change In Working Capital

  • Net Income: Net profit after tax.
  • Non-Cash Expenses: Items like Depreciation, Amortisation, Gains on Investments.
  • Change in Working Capital: Current Assets minus Current Liabilities.

OCF shows the cash you generate from day-to-day operations. It excludes investments and loans, making it a core indicator of business health.

Cash KPIs

Cash Conversion Cycle (CCC)

Formula: CCC = Average Stockholding Days + Average Receivable Days - Average Payable Days

This KPI monitors how long it takes to get paid, pay suppliers, and how long you hold stock.

Liquidity Ratios

Liquidity means the ability to find cash to pay short-term debts. Here are three ways to track it:

  • Current Ratio: Current Assets / Current Liabilities
  • Quick Ratio: (Cash + Accounts Receivable) / Current Liabilities
  • Cash Ratio: Cash / Current Liabilities

These ratios show how well you can cover short-term debts. A ratio of 1-3 is healthy, below 1 is risky, and above 3 suggests excess cash that could be better invested.

Free Cash Flow (FCF)

Formula: Free Cash Flow = Operating Cash Flow - Capital Expenditures

FCF shows what’s left after maintaining or expanding your Fixed Assets, vital for growth. It indicates available cash for debt, dividends, or reinvestment.

Cash Flow Coverage Ratio (CFCR)

Formula: CFCR = Operating Cash Flow / Total Debt

This ratio, considering both short and long-term debt, shows the business’s ability to cover its obligations from operations. A ratio above 1.5 is generally good.

Cash Burn & Runway

  • Cash Burn: Cash at start of period - Cash at end of period
  • Cash Runway: Current Cash Balance / Cash Burn Rate

Essential for start-ups, these measures help decide on investment needs and timing.

Expense Coverage

Set a target of having several months of expenses in the bank. This straightforward measure can boost confidence and facilitate growth decisions.

Profit Margins

Always consider gross and net profit margins to better understand your cash position. Positive cash flow without profit is rare.

Using The Right KPIs

While this list may seem overwhelming, picking the right KPIs for your industry and business is crucial. Not every KPI needs to be monitored monthly, but each offers a unique perspective on your financial health.


Effective cash flow management is about more than just tracking your bank balance. Using these KPIs can provide a clearer, more comprehensive view of your financial health, helping you make better, more informed decisions for your business.

Remember, managing cash flow isn’t just about survival; it’s about unlocking the full potential of your business. If you need help getting started, Crisp Accountancy is here to guide you every step of the way. Let's transform your financial data into your competitive advantage.

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