Thread
82% of business failures are due to poor cash flow management.
Uses these KPIs to never mismanage your cash flow again:
Uses these KPIs to never mismanage your cash flow again:
• Quick Ratio
(Cash + Accounts Receivable) / Current Liabilities
This ratio shows how quickly companies could meet short-term obligations.
1 or higher is considered good, but it can also be very industry-specific, so check industry averages.
(Cash + Accounts Receivable) / Current Liabilities
This ratio shows how quickly companies could meet short-term obligations.
1 or higher is considered good, but it can also be very industry-specific, so check industry averages.
• Cash burn rate
(Cash Balance Beginning of Period – Cash Balance End of Period) / # of Months in Period
This tells you how many months of cash you have in the bank.
(Cash Balance Beginning of Period – Cash Balance End of Period) / # of Months in Period
This tells you how many months of cash you have in the bank.
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
• When to take distributions
• How long before you can make a specific investment
If you’re unprofitable, it tells you how much cash you are using each month.
Your cash runway will tell you how long before you run out of money:
Cash Runway = Total Cash Reserve / Burn Rate
Understanding your burn rate and runway is important for proper cash planning.
Your cash runway will tell you how long before you run out of money:
Cash Runway = Total Cash Reserve / Burn Rate
Understanding your burn rate and runway is important for proper cash planning.
• Cash Conversion Cycle
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).
Read more:
newsletter.kurtishanni.com/p/gamifying-cash-management-in-your-business
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).
Read more:
newsletter.kurtishanni.com/p/gamifying-cash-management-in-your-business
• 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.
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
Ideally, you’re generating enough cash from operations to support business growth:
• Buying new equipment
• Buying inventory
If operating cash flow is negative, cash is coming from:
• Investing Activities
• Financing Activities
• Previous cash balances
• Owner funding the business
You need to understand why and how you’re going to fix it.
• Investing Activities
• Financing Activities
• Previous cash balances
• Owner funding the business
You need to understand why and how you’re going to fix it.
• 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.
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 can be used to:
• pay off debt
• reinvest in the business
• as a dividend for the owners
This really gives you flexibility and consistently high FCF is the holy grail of running a company.
• pay off debt
• reinvest in the business
• as a dividend for the owners
This really gives you flexibility and consistently high FCF is the holy grail of running a company.
If you understand these 5 numbers, you are set up to manage your cash well.
To better understand business finances, join 11k+ who receive my newsletter each week:
newsletter.kurtishanni.com/subscribe
To better understand business finances, join 11k+ who receive my newsletter each week:
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