52 Weeks of FOS

Cash Flow Metrics – Week #13 of The Financial Operating System®

Cash Flow Metrics: Key Indicators for Liquidity and Financial Health
April 28, 2025 by Calvin Wilder in Articles

The profit metrics we reviewed last week are key to a healthy business, though cash flow is what pays the bills. Cash flow metrics are also critical for understanding a business’s liquidity, cash flow efficiency, and overall financial health. These metrics ensure a company can meet its financial obligations and manage growth without running out of cash.

  1. Cash Balance:

    • Represents the amount of cash available in the bank.
    • A basic indicator of liquidity and financial stability.

  2. Days Sales Outstanding (DSO):

    • Measures the average time it takes to collect payment after a sale.
    • Formula: (Accounts Receivable ÷ Monthly Revenue) × 30 days.
    • A lower DSO indicates faster collection of receivables and healthier cash flow.

  3. Accounts Receivable Over 45 Days Old:

    • Tracks overdue receivables to identify potential bad debts.
    • Helps businesses address cash flow risks.

  4. Days Payable Outstanding (DPO):

    • Reflects the average time the business takes to pay its suppliers.
    • Formula: (Accounts Payable ÷ Monthly Operating Expense) × 30 days.

  5. Days in Inventory:

    • Indicates how long inventory remains unsold.
    • Formula: 30 days ÷ (Monthly COGS ÷ Month-End Inventory Balance).
    • Relevant for businesses manufacturing or reselling physical goods.

  6. Inventory Turnover Rate:

    • Shows how often inventory is sold and replaced in a year.
    • Formula: Annual COGS ÷ Average Inventory.

  7. Net Working Capital (NWC):

    • Measures short-term liquidity.
    • Formula: Current Assets – Current Liabilities.

  8. Working Capital Quick Ratio (QR):

    • Indicates the ability to meet short-term obligations.
    • Formula: (Cash + Accounts Receivable) ÷ Current Liabilities.

  9. Free Cash Flow as a Percentage of Net Profit:

    • Shows how much net profit is converted into cash available for reinvestment or distribution.

  10. Months of Cash Operating Expenses in the Bank:

    • Indicates how long the business can operate on existing cash reserves and weather ebbs and flows of profitability and cash flow.
    • Formula: Cash Balance ÷ Monthly Operating Expense.

  11. Cash Runway:

    • Relevant for unprofitable businesses, showing them how long cash reserves will last.
    • Formula: Cash Balance ÷ Projected Monthly Operating Loss.

  12. Owner Take-Home:

    • Reflects total compensation to the owner, including wages and distributions net of taxes.

Importance:

Tracking these metrics ensures businesses maintain sufficient liquidity, manage cash flow efficiently, and avoid financial distress. They also provide insights into operational performance and areas for improvement.

Next Step:

Business owners can self-implement The Financial Operating System. Chapters are available to download at smartbooks.com/resources or you can buy the whole book from Amazon (the marketing firm version or the general business version).

If you would like assistance with implementation or would like to accelerate results for your business, please contact author Cal Wilder at cwilder@smartbooks.com or book a free consultation with our team directly using this calendar link.