Understanding cash flow is one of the primary steps in making sure your business finances aresustainable. Cash flow is the amount of money coming into and leaving your company during aspecified timeframe. If you have more money coming in than leaving, you have a positive cashflow and that’s a strong indicator of financial health. But there’s more nuanceto thecalculations and understanding cash flow metrics and key performance indicators (KPIs) canhelp you make sure you have enough funds to pay your bills and grow your business.
In this article:
- 24 cash flows metrics and KPIs: formulas, calculations and examples
- Choose the right cash flow metrics for your business
- Why you need cash flow scenario analysis
What Are Cash Flow Metrics?
A metric is any quantifiable measure of a business function. Cash flow metrics are financialindicators that show how effectively a company is performing. These measures can also helpyou make decisions and assess the quality of economic policies. Investors also use theinformation to compare companies.
Key Takeaways
- Measure cash flow with KPIs and metrics, and use them to benchmark against historic dataand other similar businesses.
- Cash flow management KPIs can help you understand current and potential financialposition so you can make better informed business decisions.
- Targeted KPIs and metrics enable your business to respond rapidly in times of financialcrisis.
Cash Flow Metrics vs. Cash Flow KPIs
Cash flow metrics are simple measures of information and are often found on financialstatements. KPIs, on the other hand, give more insight and add meaning to the metrics. Forexample, seeing a metric of net income is helpful, but it becomes meaningful when otherinformation, such as performance over time or how assets relate to liabilities, etc., arefactored in. KPIs for cash flow are financial metrics that guide management and stakeholderdecision-making.
Is cash flow a KPI?
Cash flow statements are summary documents that detail the cash or cash equivalents goinginto and leaving your business. There are many cash flow related KPIs, including operationalcash flow and working capital measures.
Cash flow vs. profits
Cash flow is different from profits. Cash flow measures money coming into and going out ofthe business. Profit is the money left over after the business pays its bills.
How Do You Measure Cash Flow?
A cash flow statement shows how much cash your company takes in and spends over a givenperiod of time, while the balance sheet gives insight into the health of your company,including information about its liquidity, changes in assets and liabilities and shareholderequity. The cash flow statement isone of three financial documents that must be filed with the SEC by publicly tradedcompanies (the other two are the income statement and balance sheet).
How to measure cash flow performance
Cash flow statements include three components. This information provides you, as well aspotential investors, with insight into your company’s financial health.
- Operating activities, including transactions from buying and selling inventory, suppliesand paying salaries and wages.
- Investing activities, such as treasury notes or other securities, as well as gains orlosses from the sale of equipment.
- Financing activities, which include interest fees paid or received, payment of long-termdebt, issuing debt or stock, and payment of dividends.
What is a good cash flow ratio?
There are many cash flow ratios and KPIs you can use to better understand the financialfooting of your company. One of the most common is the current or working capital ratio.This KPI looks at your current assets and liabilities. A good rule of thumb is if your ratiois more than 1:1 of assets to liabilities, you can meet financial obligations — thoughthereis some nuance to it, which is why it's vital to track multiple KPIs to get a better pictureof financial state.
Top Cash Flow Metrics and KPIs
The best cash flow metrics and KPIs tell you about your company's financial well-being andpotential. Investors can calculate some of these metrics using figures from financialstatements.
Many of these metrics help investors understand a company’s finances. For businessowners andstakeholders, KPIs give insight into important decisions, for example, they might inform adecision to pursue new product lines or even when internal processes, such as accountsreceivable, need revamping.
1. Operating cash flow
Operating cash flow (OCF) is the movement of money into and out of a business. It’susuallylisted first on the cash flow statement and is sometimes listed as “cash flow fromoperatingactivities” or “net cash generated from operations.” This metric does notinclude revenuefrom interest or investments. Excellent operating cash flow is enough to support thebusiness's activities on its own without additional loans or outside investment.
Operating cash flow = Net income + Non-CashExpenses + Change in Working Capital
Using the income statement, calculate the operating cash flow KPI by adding the net incomeand the non-cash expenses, then subtracting any working capital increases.
In one cash flow KPI example, a large telecommunications company reported the following onits cash flow statement (in millions):
- Net income: $7,500
- Depreciation and amortization: $20,000
- Inventory adjustments: -$13,000
- Accounts receivable adjustments: +$2,200
- Accounts payable adjustments: -$1,400
This company’s OCF = $7,500 - $2,200 + $13,000 -$1,400 + $20,00 = $36,900.
This result is a good year with plenty of operating cash flow for this company.
2. Working capital
Working capital is ameasure of liquidity, indicating how quickly a business can generate cash. Short-terminvestments that could be converted to cash in less than a year, cash and accountsreceivable all help inform this metric. Additionally, liabilities such as accounts payablewill come into the formula. Your liabilities and assets should be listed on your balancesheet. Express this metric as a ratio.
Working capital = Current assets / currentliabilities
A working capital ratio greater than 1 means that your company can pay its currentliabilities.
For example, a company's balance sheet has $400,000 in current assets, considering its cash,accounts receivable and inventory. It has $215,000 in liabilities, considering its accountspayable, short-term debt, recent notes payable, payroll and accrued expenses.
This company’s working capital ratio = $400,000 / $215,000 = 1.9. This result showsthiscompany has almost $2 in assets for every $1 in liabilities.
3. Forecast variance
It’s common and helpful for companies to predict future financial positions withforecasts.Forecast variance, also known as the variance formula, shows the difference between theforecast and the outcome. Tracking over time helps you understand and improve forecastaccuracy. Express this as an integer or a percent.
This company’s forecast variance = [($12,500-$10,000) / $10,000] x 100 = 25%. Asignificantevent may have helped improve the business in January. This can inform future forecasts.
4. Days Sales Outstanding
Sometimes known as debtor days, dayssales outstanding (DSO) reflects the average number of days to receive payment for sales.
Days sales outstanding = (Average accountsreceivable amount in a given period / total credit sales in the same period) x number ofdays in the period
A low DSO means that buyers are paying your company for services or goods quickly. A high DSOcould indicate issues with collections, which can impact your cash flow.
For example, an office furniture retailer has accounts receivable of $40,000 for the quarter.For the same quarter, the value of sales is $240,000. There are 90 days in the quarter.
This retailer’s DSO for this quarter = ($40,000/$240,000) x 90 days = 15 days. Thestandardfor what’s a reasonable DSO varies by industry. In retail, that might be around sevendays,where in manufacturing it might be closer to 60. Monitor trends over time and compare yourperformance against peer companies.
5. Days Payable Outstanding (DPO)
Also known as creditor days, days payableoutstanding (DPO) is the average time it takes a company to pay its invoices or accountspayable.
DPO = (Average accounts payable / cost ofgoods sold) x number of days in accounting period
A greater number of DPO could also mean more cash on hand to invest in the short term.However, excessively high DPO means that companies are at risk of losing their creditors orgood credit terms. DPO that’s too low means that a company is not taking advantage ofitscredit period.
For example, a company's accounts payable averages were $400,000 per year. Its COGS for thatsame year is $5,500,000. The number of days in that period is 365.
This company’s DPO = ($400,000/$5,500,000) x 365 = 27 days. Therefore, this companytakes anaverage of 27 days to pay its accounts payable. Around 30 days for creditor days is usuallyconsidered an excellent DPO.
6. Accounts receivable turnover
Also known as debtor turnover ratio, the accounts receivable turnoverratio gives insight into the efficiency of your company's debt collection.
Accounts receivable turnover ratio = Netcredit sales / Average accounts receivable
High AR turnover indicates a company is good at collecting from its customers. The more timesa business turns over accounts receivable, the more money it collects. Similarly, low ARturnover means a business either has difficulty collecting from customers or that isoffering payment terms that are too flexible.
For example, a company has a beginning accounts receivable for the year of $50,000 and anending accounts receivable of $54,000. Its average accounts receivable for the year =($50,000 + $54,000)/2 = $52,000. Its net credit sales for the year were $600,000.
This company’s accounts receivable turnover ratio = $600,000/$52,000 = 11.54. Thismeans thatthe company turned its receivables to cash 11.54 times for the period. Whether this ratio isappropriate for this company depends on its payment policy.
7. Accounts payable turnover
Also known as the creditor's turnover ratio, accounts payable turnover is the number of timesa company pays its creditors in a given period. This metric is a measure of short-termliquidity.
Accounts payable turnover ratio = Totalpurchases on credit / [(beginning accounts payable + ending accounts payable)/2]
For example, a company has a beginning accounts payable of $5,000 and ending accounts payableof $15,500 during a year. For that period, the business purchases, on credit, $20,000 worthof new equipment.
This company’s accounts payable turnover for the period is $20,000/[($5,000 +$15,500)/2] =2.7. This means that the business pays its average accounts payable balance more than twotimes every year. Compare this value to other companies in the industry and the vendorpayment terms.
8. Current ratio
The current ratio is a measure of a company's ability to pay off its short-term liabilities.Note that liquidity and cash flow are not the same thing — a company can have negativecashflow but still be highly liquid if they have a stockpile of cash.
Current Ratio = Current assets / currentliabilities
Current assets should include accounts receivable, and current liabilities should includeaccounts payable and accrued expenses. A higher current ratio is a sign that your businesscan pay off its short-term debts. In general, between 1.5 and 2.5 is considered a goodliquidity. If your current ratio is 1.5, that means your company has $1.50 for every $1 incurrent liabilities. Keep an eye on this ratio because low ratios can indicate problemscovering upcoming bills.
For example, a large company reports (in millions) current assets of $45,000 and currentliabilities of $39,000.
This company’s current ratio = $45,000/$39,000 = 1.15. This value means that thiscompany ismeeting its financial obligations but could improve.
9. Return on equity
Return on equity (ROE) is an ROI metric that indicates a company's net income compared to itsshareholder equity.
Return on equity = (Net income / averageshareholder’s equity) x 100
Ideally, this percentage will increase over time, indicating how well a company is using itsinvestors’ money — what sort of return it’s getting for the moneyit’s raised. An ROE thatdecreases over time could be a sign of poor investing decisions.
For example, a large company has (in millions) earnings that year of $40,000 and $390,000 inshareholder equity.
This company’s ROE = ($40,000/$390,000) x 100 = 10.26%. Tracking the ROE over time andcomparing to previous years shows trends and gives insight into the potential financialfuture of the company.
10. Cash flow from operations
What is cash flow from operations? Cash flow from operations, or operating cash flow, is theamount of cash a company generates from its daily activities, such as selling goods orproviding services, over a given time — often a quarter or fiscal year.
Cash flow from operations = Net income +non-cash items + changes in working capital
For example, a company has (in millions) an operating income of $8,500, depreciation of $0and changes in working capital of -$1,200. This business’s cash flow from operations =$8,500 + $0 -$1,200 = $7,300. This finding means that this company generated $7,300 in cashflow that year.
There are some limitations with operating cash flow. It doesn’t include the costs ofbuyingand maintaining fixed assets or the effect of changes in working capital. This meanssometimes operating cash flow does not illuminate when a business is struggling. And freecash flow takes these and other factors into account, which provides a more complete pictureof your company’s ability to grow and pay its bills and investors.
11. Free cash flow
Free cash flow (FCF) is a figure that shows how much money is left over after payingshort-term liabilities and purchasing property or equipment. The remaining funds can eitherbe reinvested in the business or used to pay dividends. Free cash flow is aboutshowing how much surplus cash flow is available after operating expenses and capitalexpenditures.
Free cash flow = Operating cash flow–capital expenditures
You can use a high amount of FCF to pay off debt, make investments and attract investors.
For example, a small business reported $53,000 for its operating cash flow and spent $15,000on new equipment for the period. This business’s free cash flow = $53,000 - $15,000 =$38,000. This finding means that the small business has $38,000 to use to improve itsoperations.
12. Cash flow coverage ratio
The cash flow coverage ratio (CFCR) looks at your company’s ability to pay its debtswith itscash flow from operations.
Cash flow coverage ratio = (Cash flow fromoperations / total debt) x 100
For example, in a company's cash flow statement (in millions) last year, its cash flow fromoperations was $11,500, and total debts were $86,000. This company’s CFCR = ($11,500 /$86,000) x 100 = 13.37%. Next, you can estimate how long this debt would take to pay off ifall these conditions stay the same. The number of years = 1/13.37% = 7.5 years.
13. Operating Cash flow margin
The cash flow margin examines the cash coming from operating activities as a percentage ofsales revenue in a specified time frame. A positive percentage here is a good indicator ofbusiness profitability and efficiency.
Cash flow margin = (Cash flow fromoperating activities / net sales) x 100
For example, a company had (in millions) cash flow of $5,000 and net sales of $9,200, and itscash flow margin = ($5,000 / $9,200) x 100 = 54.3%. This finding shows good profitability.
14. Cash flow from investments
Cash flow from investments shows the cash earned and/or spent on investing opportunities,such as selling equipment, real estate or stock.
Cash flow from investments = Amountgenerated from sales of assets – cost to buy assets
If, for instance, a company sold its old equipment for $150,000 and bought new machinery inthe same period for $300,000, its cash flow from investments = $150,000 - $300,000 =-$150,000. This result is just one piece of the cash flow statement and is not a cause forconcern by itself since it could show investment in the business.
15. Levered cash flow
Levered cash flow (LCF) is the cash that a business has after meeting its financialobligations, such as operating expenses and interest. Unlevered cash flow is before thecompany meets its obligations.
Levered cash flow = EBITDA – changein networking capital – capital expenditures – debt payments
Levered cash flow is money a company can use to pay out dividends and invest in the business.A higher LCF makes the business attractive to financers.
For example, a company's figures for a year are $300,000 in EBITA, $120,000 in workingcapital, $40,000 in capital expenditures, and $100,000 in debt payments. Thiscompany’s LCF= $300,000 - $120,000 - $40,000 - $100,000 = $40,000. Negative LCFs can happen some years,based on the investments in the company.
16. Cash flow from financing activities (CFF)
Cash flow from financing activities (CFF) is the information from a company's cash flowstatement that details the net cash flows funding the company. This metric tells investorsabout the company's financial strength.
CFF = Cash inflows from issuing debt orequity – (cash paid as dividends + repurchase of debt and equity)
This measure details the company debts, equities and dividends. It can vary under differentterms of debt, dividend policy or capital structure. The CFF is a section in the cash flowstatement.
For example, a company has the following information on its cash flow statement for inflowsand outflows (in millions):
- Long-term debt proceeds: $2,000
- Dividend payments: $300
- Repurchase stock: $800
This company’s CFF = $2,000 – ($300 + $800) = $900. Compare this CFF across yearsfor thiscompany.
17. Cash conversion cycle
The cash conversion cycle (CCC), also known as the net operating cycle, is a measurement ofthe company's time to convert its investments and inventory to cash, usually measured indays.
Cash conversion cycle = Days inventory +Average collection period – DPO
This KPI also accounts for how long it takes a company to sell off inventory, accountsreceivable and accounts payable. There are three stages to this cycle.
Days inventory outstanding looks at the amount of time it takes to sell your inventory. Thesecond stage is the days sales outstanding, which is the time it takes to collect money fromsales and the third stage is the time it takes for the company to pay off its obligations.
For example, a company reported (in millions) $2,000 in average inventory, with COGS at$50,000. Its average accounts receivable for this period was $5,000 and credit sales were$100,000. Finally, this company reported its average accounts payable as $1,200. Puttingthis together, in the first stage, the DIO = ($2,000/$50,000) x 365 = 14.6. Then with thesecond stage: DSO = ($5,000/$10,000) x 365 = 18.25. And finally, the third stage: DPO =($1,200/$50,000) x 365 = 8.76. Together, the CCC = 14.6 + 18.25 – 8.76 = 24.09. Ittakesthis company about 24 days to turn its original cash investment to inventory and then backinto cash.
18. Total available liquidity
The total available liquidity is the aggregate sum of all cash and cash equivalents on handfor a company. This metric can also include the company's borrowing capacity.
Total available liquidity = Cash and cashequivalents + marketable securities + accounts receivable
By itself, this measurement does not mean a lot. Most companies use these figures as a ratioagainst liabilities. Available liquidity can help gauge standing before making financialdecisions.
For example, on its balance sheet a company has (in millions) cash of $50,000, marketablesecurities of $40,000 and accounts receivable of $80,000. This company’s totalavailableliquidity = $50,000 + $40,000 + $80,000 = $170,000.
19. Liquidity ratio
Also known as the quick ratio or acid-test ratio, the liquidity ratio is a metric that showshow well a debtor can pay off its current debt without acquiring additional capital. ThisKPI is a short-term metric of financial fidelity.
Liquidity ratio = (Cash + securities +accounts receivable) / liabilities
Liquidity ratios are most valuable when analysts compare them to previous periods or to thoseof other companies of similar size in the industry. This ratio excludes inventory from itscalculation.
For example, on its balance sheet, a company has (in millions) cash and cash equivalents of$45,000, short-term marketable securities of $50,000, accounts receivable of $20,000 andtotal liabilities of $100,000. This company’s liquidity ratio = ($45,000 + $50,000 +$20,000)/$100,000 = 1.15. This liquidity ratio is greater than 1, so many companies wouldconsider it good. This figure means that this business has enough working capital to pay itsliabilities.
20. Daily and weekly aged debtor analysis
Accounts receivable aging is a list of all the debts your company is owed ordered by how longthey’re outstanding. Keeping an eye on how long it takes to receive payment forproducts orservices is a good signal of accounts receivable practices. And if it takes longer thannormal to receive payment, it could be an indicator that your company should reevaluate itscredit practices. Track this over time and compare against peer industries.
Daily and weekly aged debtor analysis =(Trade receivables / sales in annual credit) x 365 days or 52 weeks
For example, a company has (in millions) $4,000 in trade receivables — or the amount ofmoneyowed to the business — and sales in annual credit of $20,000. This company’sdaily debtoranalysis = ($4,000/$20,000) x 365 = 73 debtor days. The debtor weeks = ($4,000/$20,000) x 52= 10.4 weeks. Use benchmarking to determine if the days or weeks is appropriate for yourindustry.
21. 30-day and 13-week operating cash burn
Also known as the burn rate, 30-day and 13-week operating cash burn are the rates a companyuses its cash in short- and medium-term scenarios. Some cash burns are due to seasonaltrends, not failing businesses. Companies should carefully monitor periods of cash burn.
30-day and 13-week operating cash burn =[(Starting balance of 13 week period – ending balance of 13 week period) / 3] x 3.25
Positive burn rates show that a company is spending more than it is taking in. A 13-weekperiod is a standard in medium-term scenario planning, and many companies have their cashflows built for a rolling 13-week report.
For example, in the beginning quarter of the year, a company has $150,000 in starting balancefor cash flow. At the end of this period, the company has $90,000. For the 30-day burn rate= ($150,000 - $90,000)/3 = $20,000. The 13-week operating cash burn = $20,000 x 3.25 =$65,000.
22. Weeks of liquidity on hand
Weeks of liquidity on hand is a measure of the liquidity available. This can be particularlyhelpful to understand to plan for times of economic stress. This metric shows how many weeksa business can pay its current financial obligations.
Weeks of liquidity on hand = (Currentassets / current cash outflow per week) / 52
Run different scenarios based on various economic stress situations.
For example, a small business sees major economic stress coming. The company wants to knowhow long it can stay in business if it turns some assets into cash. It has $500,000 incurrent assets and a total of $20,000 in spending per week. This business’s weeks ofliquidity on hand = $500,000/ $20,000 = 25 weeks. In times of economic crisis, manybusinesses look at cuts they can make to their cash outflows to stabilize cash flow.
23. Sustainable growth rate
A sustainable growth rate (SGR) is the maximum growth a company can have without taking onadditional debt. This growth should come from improved revenue, not new loans.
Sustainable growth rate = ROE x (1 -dividend payout ratio)
High SGRs show maximized sales, high-margin products and/or a well-managed inventory. Asustained high SGR is difficult for companies to achieve, as there will likely be asaturation point for growth without investment. Some companies then move into new productsor product lines when they are at risk of stagnation.
Calculate the SGR using the return on equity (ROE) from shareholder's equity and the dividendpayout ratio from the financial statement. Remember, ROE is a company's net income comparedto its shareholder equity and is expressed as a percentage. And the dividend payout ratio isthe earnings your company pays shareholders as a percentage of the business’searnings.For example, a firm has an ROE of 10.26% and a dividend payout ratio of 45%. Thisfirm’s SGR= 0.1026 x (1- 0.45) = 0.0564 or 5.64%. This finding means that this business can grow at arate of 5.64% without taking on any more debt by using its current sales. It will requireadditional financing if it wants to increase this SGR.
24. Price-to-cash-flow ratio
The price-to-cash-flow (P/CF) ratio is the company's worth based on its cash flow. Investorsuse this metric to see if the company valuation is fair and how much cash their investmentgenerates.
Price-to-cash-flow ratio = Share price /(operating cash flow / outstanding shares)
A low P/CF ratio could indicate the organization is undervalued, and a high ratio may meanit’s overvalued. These figures also depend on their industry and maturity in themarket.Newer companies may trade at higher ratios due to their growth potential.
Calculate the price to cash flow using the average stock value from at least 60 days and thecash flow per share using the trailing 12-month operating cash flows divided by the numberof outstanding shares.
For example, a large company has (in millions) 15,000 shares outstanding and $60,000 inoperating cash flow. The price of its shares for that period was $16 each. Thiscompany’sP/CF = $16/($60,000/15,000) = $4. Review the P/CFs of multiple years and different companieswithin the industry.
Why Cash Flow Scenario Analysis Is Important
When your company looks at and evaluates possible future scenarios and predicts outcomes,that’s called scenario analysis. It can show investors and stakeholders possibleeffects ofvarious financial investments, activities and situations. Scenario analysis also helpscompanies set plans before crises happen.
A cash flow metrics analysis is when a business looks at the line items on its cash flowstatement and draws conclusions for the state of the business. There are three main types ofcash flow analyses.
Cash from operating activities: This is money from customers minusoperating expenses. These expenses include salaries and wages, rent, utilities andsupplies.
Investing activities: This includes long-term, or capitalinvestments, like property equipment in a plant and stock or securities.
Financing cash flow: This funding comes from investors, owners andcreditors. It’s classified as debt, equity and dividend transactions on thecashflow statement.
Performing cash flow analysis canhelp your company plan for the future so when disaster strikes or growth opportunitiesarise, the first step of planning how to react is already complete. Here are a few benefitsof cash flow scenario analysis.
Better planning for the future: Showing investors what could happenif they choose to fund your company and giving examples and models of growth canencourage them to support your firm.
Anticipate risks: What’s the worst-case scenario for howthingscould go for your business? By examining for future disasters or even justunfavorable outcomes, your company is better prepared to weather storms.
Improving company culture: By taking a proactive approach withscenario analysis, you can help build a data-driven company culture.
Visualizing Cash Flow Metrics and KPIs
Tracking these and other cash flow metrics and KPIs is best done with powerful financemanagement software. These platforms can analyze the data and serve up KPIs, metrics andreports in cash flow dashboards, often with visualizations to better understand theinformation and implications. The most advanced finance management tools can providereal-time data in these dashboards.
Which KPIs you choose to display will vary on a few factors — company size, industry,etc.Some of the most common and insightful KPIs to show on your dashboards include:
- Actual cash flow
- Forecast cash flow
- Net debt and liabilities
- Liquidity metrics: actual and forecast
- Opening and closing cash balances
These metrics give companies a quick look at financial position and could inform if there areadjustments that need to be made.
Best Practices for Managing Cash Flow
Monitoring cash flow has many benefits for a business. One of their best uses is helping youplan for and address any shortfalls. These best practices can help you keep yourorganization solvent and maintain a steady cash flow.
Offer customers incentives to pay at the point of sale or early.
When possible, negotiate terms with vendors to extend your payment terms to net 60 ornet 90.
Identify and address any cash flow issues early to avoid long-term harm to yourbusiness. Some of the best ways todo address cash flow concerns include accessing a line of credit, improvinginvoicing processes and cutting costs by identifying waste.
When possible, automate your invoicing with finance software so invoices are sentpromptly and payment is received more efficiently.
Create a back-up plan and have some cash reserve on hand to cover shortfalls whenthey occur.
Pick a software tool for your financial data monitor KPIs regularly.
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How to Pick the Right Cash Flow KPIs for Your Organization
Which KPIs you choose to monitor will vary depending on your industry, business and evenroles within your company. For example, executives may be most interested in medium andlong-range goals, while line managers may be more focused on short-term metrics of success.Regardless, there are some general guidelines when selecting your goals. Try to be specificabout what you want to achieve, realistic about what’s possible and remember that notallKPIs will apply to everyone in the business. Setting appropriate business goals that teamscan work toward is a fundamental practice that can greatly influence growth and financialhealth.
Choose qualitative and quantitative measures. Quantitative data canbe found on your financial statements. Look for other data describing how you get tothe numbers with qualitative measures. Some examples of qualitative information toinclude might be customer satisfaction, events that have harmed yourbusiness’sreputation or high employee turnover.
Use leading and lagging indicators. Most KPIs look at laggingindicators such as profit and revenue. Complement these with leading indicators thatgive you an idea of how long it may take to reach specific financial goals. Leadingindicators could include average inventory, average receivables and averagecollection days.
Don't measure everything. Stick to your business goals to guide yourchoices. Don’t get bogged down in trying to analyze every KPI and metricavailable.Instead, identify those that would be most meaningful for your team and where youcan have the biggest impact and focus your efforts.
Use trend data. Compare your data with results for other periods andwith other companies in your industry. These comparisons can help add context toKPIs and metrics, as well as help you set reasonable and achievable goals.
Leverage software solutions. Advanced software solutions arecritical for monitoring cash flow and other KPIs. The most powerful enterpriseresource planning (ERP) software integrates data from around your business —including inventory management, human resources, customer relationship managementand much more — to improve and add to financial data. And when run fromcloud-basedtechnology, these ERP tools can provide real-time data accessible from anywhere withan internet connection.
In business the adage of cash is king holds true for a reason. Without a healthy cash flow,your company’s profitability, growth and viability are threatened. It’simportant to keep aneye on and understand your company’s cash position, how it relates to previousperformanceand where it might be in the future. Monitoring KPIs and other cash flow metrics plays a keyrole in understanding the financial health of your company. And financial management software provides thetools and technology to aggregate financial and other business information, then displaythat data in simple-to-understand dashboards. These visualizations give you the insight youneed to keep an eye on the financial health of your business.
