Cashflow Analysis
As a business owner, cash flow is one of, if not THE, most important aspect of your company. It is therefore a metric you always need to track & this is where cashflow analysis can help. It measures how much money is being made & spent at any given time. Strong cash flow means your business is operating comfortably within its means. When you’re cash-flow positive, you can pay your bills on time & maintain a good relationship with vendors & other stakeholders. Negative cash flow means your business is being stretched to a breaking point. Cash flow can be improved by:
- sending invoices straight away
- having a system in place to chase clients for payment
- consider offering an early payment discount
- conduct customer credit checks
- negotiate generous payment terms with suppliers
- use a business credit card (but pay off in full every month)
- ensure that you minimise the amount of stock you need to hold
- consider leasing, rather than buying
It is good practice for a business to forecast cashflow for up to the next 12 months, so large payments (tax bills, capital purchases, bonuses etc.) can be planned for & surplus cash put to good use.
Key Financial Ratios
Profitability Ratios
1) Gross Profit % of Sales (Gross Profit Margin)
Gross Profit x 100
Revenue
2) Operating Profit % of Sales (Net Profit Margin)
Operating Profit x 100
Revenue
3) Return on Capital Employed (ROCE)
Operating Profit x 100
Capital Employed
Liquidity Ratios
4) Current Ratio
Current Assets
Current Liabilities
5) Quick Ratio
Current Assets - Stock
Current Liabilities
6) Inventory Turnover (in days)
Inventory x 365
Cost of Sales
7) Receivables Collection Period (in days)
Receivables x 365
Credit Sales
8) Payables Collection Period (in days)
Payables x 365
Credit Purchases
9) Asset Turnover (times)
Revenue
Total Assets - Current Assets
Financial Position Ratios
10) Gearing (%)
Long-term Liabilities x 100
Total Equity + Long-Term Liabilities
11) Interest Cover Ratio (times interest is earned)
EBIT
Interest
12) Dividend Cover Ratio
Profit less preference dividend
Dividend
