12 Game-Changing Cash Flow KPIs for Small and Medium Businesses

Are you experiencing cash flow blindspots in your UK small business? Do you struggle to hit the cash flow targets you’ve set?

If so, you’ve come to the right place. In this guide, I’ll share how tracking cash flow KPIs can work like a satnav for your finances, ensuring your business stays on course to meet its cash flow goals.

Did you know?

A staggering 48% of small businesses in the UK are cash flow negative, meaning every other business is losing money and potentially facing closure.

But here’s the good news.

As a cash flow coach, I’ve seen firsthand how mastering cash flow KPIs can empower businesses to take control of their finances. That’s exactly what I’m going to share with you in this guide.

Why Listen to Me?

I’m a cash flow specialist who has helped hundreds of clients improve their financial health. I’ve shared my expertise on major platforms like QuickBooks Online, Independent, Zoho, and Floatapp. Not only that, but I also run my own consulting company, Hungry Cash Flow Ltd., dedicated to helping businesses thrive through better cash flow management.

So, rest assured, you’re in capable hands. Let’s dive into those KPIs and clear up your financial blindspots so you can reach your cash flow targets.

Key takeaways

•  
• Cash flow KPIs (Key Performance Indicators) are critical, actionable indicators tied to your specific business goals, unlike broader cash flow metrics, which only provide basic financial data.
• Small businesses should focus on key cash flow KPIs like Cash Burn Rate, Cash Runway, and Cash Conversion Cycle, aligning them with their unique business model, objectives, and industry benchmarks.
• Avoid common pitfalls like over-reliance on a single KPI or neglecting market trends.

Understanding Cash Flow: The Fuel for Your Business

Before we dive into specific KPIs, it’s crucial to grasp the fundamentals of cash flow. In simple terms, cash flow is the money moving in and out of your business. It’s like your business’s circulatory system, keeping it alive and healthy. Effectively managing cash flow is crucial for the survival and growth of any business.

Your cash flow statement is the financial document that tracks and summarizes this movement. It shows you where your cash is coming from (revenue, investments, loans) and where it’s going (expenses, debt payments, etc.). By analyzing your cash flow statement, you can gain valuable insights into your business’s financial health and identify areas for improvement. Healthy working capital – the difference between your current assets (like accounts receivable) and current liabilities (like accounts payable) – is essential for smooth day-to-day operations. This analysis, known as cash flow analysis, is a key component of financial management.

12 Essential Cash Flow KPIs to Steer Your Business Towards Success

Now that we’ve covered the basics, let’s explore the 11 cash flow KPIs that can help you gain a deeper understanding of your financial performance and make informed decisions.

Core Cash Flow KPIs

1. Operating Cash Flow:

• • What It Is: The lifeblood of your business, representing the cash generated from your core business activities like sales revenue, services, and any other operations. The cash flow margin is a useful metric to gauge how much cash your business operations generate relative to revenue.

• • Why it matters: A healthy operating cash flow indicates that your business can sustain itself and has enough cash to cover its day-to-day expenses.

• • Pro Tip: Increase your operating cash flow by improving collection times, negotiating better payment terms with suppliers, and optimizing inventory levels.

2. Free Cash Flow (FCF):

• • What It Is: Think of this as your “fun money.” It’s the cash left over after you’ve covered all essential operating expenses, investments in assets like equipment or property and covering debt obligations.

• • Why It Matters: Free cash flow is a key performance indicator of your business’s financial strength and flexibility. It’s the cash you have available to reinvest in your business, pay down Debt, being a significant financial metric, or even distribute to owners.

• • Pro Tip: Boost your free cash flow by increasing revenue, reducing costs, and carefully managing capital expenditures.

3. Cash Conversion Cycle (CCC):

• • What It Is: This measures the time it takes to convert inventory into cash from sales. In essence, it’s the time your money is “tied up” in working capital and the sales process. The CCC is expressed in days, representing the average number of days it takes to complete this cycle.

• • Why It Matters: A shorter CCC means your cash is flowing more quickly, giving you more financial flexibility and reducing the need for external financing.

• • Pro Tip: Shorten your CCC by improving inventory turnover, speeding up customer payments, and strategically managing supplier payments.

 

Supporting Cash Flow KPIs

4. Cash Burn Rate:

• • What It Is: Your financial speedometer, telling you how quickly you’re spending your cash reserves.

• • Formula: (Starting Cash – Ending Cash) / Time Period

• • Pro Tip: Be sure to factor in all expenses, even those that don’t occur monthly (like rent or insurance).

5. Cash Runway:

• • What It Is: Your financial fuel gauge is a vital financial metric, revealing how many months you can operate before the cash runs out.

• • Formula: Current Cash / Monthly Cash Burn Rate

• • Pro Tip: Aim for a healthy buffer in your cash runway to account for unexpected expenses and strategically plan for profitability or fundraising.

6. Days Sales Outstanding (DSO):

• • What It Is: Your customer payment thermometer, measuring how long it takes customers to pay you after a sale.

• • Formula: (Accounts Receivable / Total Credit Sales) * Number of Days

• • Pro Tip: Implement efficient invoicing and follow up on late payments promptly. Consider offering early payment discounts to incentivize faster payments.

7. Days Payable Outstanding (DPO):

• • What It Is: Your supplier payment thermometer, showing how long you take to pay your suppliers.

• • Formula: (Accounts Payable / Cost of Goods Sold) * Number of Days

• • Pro Tip: Find a balance between extending your DPO to preserve cash and maintaining strong supplier relationships. Prioritize payments based on early payment discounts or late payment penalties.

8. Days Inventory Outstanding (DIO):

• • What It Is: Your inventory turnover gauge, measuring how long inventory sits before being sold.

• • Formula: (Average Inventory / Cost of Goods Sold) * Number of Days

• • Pro Tip: Regularly review inventory levels and use inventory management software to optimize stock levels and reduce carrying costs.

9. Cash Conversion Efficiency (CCE):

• • What It Is: Your sales-to-cash conversion rate, showing how effectively your business converts sales into cash.

• • Formula: Cash Flow from Operations / Net Sales
  • Pro Tip: Streamline operations and tighten your sales processes to maximize the efficiency of converting sales into cash. Benchmark against industry standards to see where you stand.

10. Current Ratio

• • What It Is: A quick snapshot of your ability to pay your short-term debts with your current assets.

• • Formula: Current Assets / Current Liabilities

• • Pro Tip: A healthy current ratio typically falls between 1.2 and 2, but the ideal range can vary by industry.

11. Quick Ratio:

• • What It Is: Your emergency cash lifeline, giving you a more immediate view of your liquidity by excluding inventory (which may not be easily converted to cash).

• • Formula: (Current Assets – Inventory) / Current Liabilities

• • Pro Tip: A quick ratio of 1 or higher is generally considered good.

12. Cash Flow Coverage Ratio

• • What It Is: Your debt repayment capacity meter, measuring your ability to cover debt payments with your operating cash flow.

• • Formula: Operating Cash Flow / Total Debt

• • Pro Tip: A higher ratio indicates a stronger ability to meet debt obligations, which is a key financial metric. Lenders often look at this ratio when considering loan applications.

Crafting Your Cash Flow Strategy: A Tailored Approach

Don’t just go picking and tracking any random KPIs! Just like shoes, one size doesn’t fit all when it comes to these metrics. You need to invest some time understanding what to track before you start tracking.

“Shishir, how do I decide? These all seem super important!”

I hear you! While getting expert help is always a smart move, I won’t leave you hanging if that’s not in the budget. Here’s how to approach choosing the right KPIs:

Assess Your Business Model:

Think about how your specific business model affects your cash flow.

Example: A service-based consultancy might focus more on Days Sales Outstanding (DSO) to ensure timely payments, while a retail store might prioritize Days Inventory Outstanding (DIO) and the Cash Conversion Cycle (CCC) to optimize inventory management.

Define Your Business Objectives:

Align your KPIs with your overall goals.

Example: If a brewery wants to expand, they should focus on Cash Runway and the Free Cash Flow Conversion Ratio to ensure they have the financial fuel for growth.

Analyze Your Historical Data:

Your past financial records hold valuable insights.

Example: A florist might uncover seasonal cash flow patterns, helping them decide which KPIs to prioritize during different times of the year.

Consider Industry Benchmarks:

Research your industry’s typical KPI values. This helps you set realistic targets and gauge your performance against similar businesses.

Example: A boutique hotel might compare its Cash Burn Rate and Cash Flow Coverage Ratio to industry averages.

Regular Review and Adaptation:

Remember, your business and the market are constantly evolving. Don’t be afraid to revisit and adjust your chosen KPIs as needed.

Example: A tech startup might shift its focus from Cash Burn Rate to Free Cash Flow Conversion Ratio as it matures and becomes more profitable.

Cash Flow KPI Pitfalls: Avoiding Common Mistakes for UK Small Businesses

Now, let’s shine a light on some common cash flow KPI mistakes that can trip up UK small businesses. Don’t worry, I’ll also share how you can easily avoid them.

Over-Reliance on a Single Cash Flow KPI: A Risky Monogamous Relationship

Many businesses fall into the trap of fixating on one cash flow KPI, Like they’re getting married to it, showing their commitment to tracking cash flow metrics and KPIs. This is a dangerous game, where not monitoring your cash flow metrics and KPIs could lead to financial trouble. my friend!

Sure, having  KPI can be helpful, but it’s not the whole picture. Think of it like this: your business is a complex machine with many moving parts. Relying on just one metric is like trying to diagnose a car problem by only checking the fuel gauge.

How to Steer Clear:

• Diversify your KPI portfolio: Track multiple cash flow KPIs to get a comprehensive view of your financial health.
• Consider all angles: Don’t just look at revenue; pay attention to expenses, inventory, debt, and other factors that impact your cash flow.
• Seek expert advice: If you’re unsure which KPIs to track, consider consulting a cash flow expert who can tailor a strategy to your specific business needs.

 

Neglecting Industry Benchmarks: Are You Keeping Up with the Joneses?

You’re not the first person to run a business in your industry, and you certainly won’t be the last! Unless you’re planning a move to Mars (and even then, you might have competition!), it’s crucial to see how your cash flow KPIs compare to industry standards.

Benchmarking helps you understand if your performance is in line with your peers, or if there are areas where you need to catch up.

How to Steer Clear:

• Do your research: Find out what the typical cash flow KPI values are for your industry in the UK. Several resources and industry reports can help you with this.
• Compare and contrast: Analyze how your KPIs stack up against the benchmarks. Are you ahead of the curve, or do you need to step up your game?
• Identify opportunities for improvement: If your KPIs are lagging behind the industry average, use this information to pinpoint areas where you can make strategic changes to improve your cash flow.

Ignoring Market Trends: Don’t Get Caught Off Guard

Remember, your business isn’t operating on the moon! Countless market forces and trends can either help or hinder your cash flow.

Staying informed about economic shifts, consumer behavior changes, And industry developments can help you anticipate potential cash flow challenges and adjust your strategies accordingly, ensuring the right cash flow for your business operation.

How to Steer Clear:

• Stay informed: Keep up with the latest business news, economic forecasts, and industry reports.
• Analyze the impact: Consider how market trends could affect your cash flow KPIs. For example, a rise in interest rates might impact your debt repayment capacity.
• Adapt your strategies: Be prepared to adjust your business plans and financial strategies to navigate changing market conditions.

 

By avoiding these common pitfalls, you’ll be well on your way to mastering your cash flow KPIs and achieving financial success for your UK small business.

Case Study: Dr. Bradley Cooper’s Dental Practice – Scaling Revenue and Improving Cash Flow with KPIs

Dr. Bradley Cooper’s dental practice in Fulham, London, ( I have changed the name and location to protect identity of my client) had reached a significant milestone: £1 million in annual patient revenue, reflecting strong positive business growth.

It was the result of Dr. Cooper’s hard work over 10 years building a dedicated team of dental associates, nurses to support his top class dental services to patients.

Despite the impressive patient revenue growth, Dr. Cooper often found himself scrambling to cover paying for operating lease payments, staff salaries and sometimes paying lab bills and dental associates late. He felt like money comes in and goes out even faster was unsure of where the money was going and why his bank balance didn’t always reflect the practice’s success.

That’s when he decided to implement cash flow KPIs I set out for him.

The Challenge:

Dr. Cooper’s primary concerns were:

• Unpredictable cash flow: Patient revenue fluctuated significantly, making it difficult to forecast and plan for expenses. This was particularly noticeable around July and December, and whenever he took a few weeks of holiday, as he was the primary service provider, cash flow became a rollercoaster.
• Slow-paying patients: Outstanding patient balances, especially from those on payment plans for expensive treatment, were tying up valuable cash.
• Inefficient inventory management: Dental supplies were often overstocked or expiring, leading to unnecessary expenses and ultimately bleeding cash.

 

The Solution:

With the help of a customized cash flow KPI tracker I provided Dr. Cooper began tracking  the key cash flow KPIs, including:

• Days Sales Outstanding (DSO): This revealed that patients were taking an average of 57 days to settle their bills, a significant drag on the practice’s cash flow.
• Days Inventory Outstanding (DIO): This highlighted areas where inventory could be optimized, reducing waste and freeing up cash.
• Cash Conversion Cycle (CCC): This provided a holistic view of the time it took to convert patient visits into cash, allowing Dr. Cooper to identify bottlenecks and inefficiencies in the process.

 

The Results:

Armed with this data, Dr. Cooper took targeted action:

• Payment Policy: He implemented a stricter payment policy, requiring upfront payment for certain procedures and offering incentives for early settlement.
• Inventory Optimization: He partnered with a dental supply company that offered just-in-time delivery, reducing excess inventory and minimizing waste.
• Streamlined Billing: ensures positive cash flow for better business operation. He upgraded his practice management software to automate billing and send timely reminders to patients with outstanding balances.

 

Within six months, Dr. Cooper saw remarkable improvements.

• The practice’s DSO dropped to 30 days.
• DIO decreased by 20%
• The overall CCC improved significantly.

Overall, these changes resulted in a 12.75% increase in free cash flow for the practice within seven months.

These changes translated into a more predictable and healthier cash flow, allowing Dr. Cooper to invest in new equipment, expand services, and confidently plan for the future.

 Dr. Cooper’s analysis revealed that inefficient inventory management was negatively impacting his cash flow efficiency.

Key Lesson:

Dr. Bradley Cooper’s success story demonstrates the power of cash flow KPIs in the dental industry. By identifying and addressing specific pain points, dental practices can optimize their financial performance, unlock growth potential, and ultimately, provide better care for their patients.

Take some time to reflect on your own business’s specific circumstances

We’ve covered a lot of ground today. Take some time to reflect on your business’s specific circumstances and revisit this article as needed. You can also download my free Cash Flow KPI tracker to get started.

Remember, continuous learning and adaptation are key. Stay curious, stay informed, and revisit these concepts as your business grows and evolves. As your trusted cash flow coach, I’m always here to help you navigate the financial waters and achieve lasting success.

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