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When did you last run a Cash Flow Health Check?

Posted by Aaron Zahedani on Fri, Aug 16, 2013 @ 04:41 PM

Cash flow is the life blood of your business

How recently have you ran a health check on your company? Your day to day business seems to be running smoothly, but when did you last double check your figures to find out how solvent you really are?Cash Flow solutions

This question seems an easy one to answer, but sometimes it is necessary to really consider how much ready cash flow you have in hand. It is important to remember that cash flow is not the same as profit or net income. Banks can sometimes be skittish in today's economy, and call into question your debt to cash ratio. If you had to pay back all your loans tomorrow, would you be able to?

So how easy is it to conduct a health check? Here are some simple formulas, to help you assess how well your business is holding up. 

  • Operating Cash Flow Ratio: This easy formula shows how money is moving in as well as out of your company. Your Operating Cash Flow Ratio should be more than 1.0. If it is less, the business is clearly not making enough cash to pay off short-term debt. This could mean trouble ahead and your company would be challenged to stay in business.

  • Margin Ratio: Indicates how much money is generated per dollar of sales. The operating cash flow is shown on the company's cash flow statement, and revenue on the income statement. A high operating cash flow margin is a good indication that a company is efficient at converting sales to cash, and may also indicate high earnings quality.

  • Quick Ratio: Shows your short-term liquidity. The quick ratio measures the ability to meet short-term obligations with liquid assets. The higher the quick ratio, the better the position of the company. This is often called the Acid Test.

  • Current Ratio: This measures how able you are to pay short term debt.

In basic terms, if you have poor cash flow, you may want to take a look at why. If you appear to have high profits, but find you are constantly short of cash, it is possible that you are carrying too much debt. It is critical to eat into your debt rather than allow it to consume your company. 

Paying off debt too fast may not be the best option to increase your cash flow. It is imperative that your debt is managed, and under control but slow and steady payment can be the answer to cash flow recovery. 

Keeping a balance between your level of debt, inventory, assets, accounts payable and accounts receivable will help when it comes to assessing the health of your company. Resisting the temptation of taking on more debt, even if it is offered, as the more you are leveraged, the harder it will be to keep your debt in check.

Invoice factoring is a great way to boost your cash flow without increasing your debt.  Factoring your invoices means you do not have to worry about late payment from your customers, thus helping maintain the flow of your business.  It is a quick and convenient way to solve any cash flow problems you may be experiencing in the short term.

Contact one of our finance experts today.



Visit Investopedia for any further information on all of the formulas mentioned above.




Topics: Cash Flow Solution, Cash Flow, About Invoice Factoring, Financing Government Contractors

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