Have you ever felt like your business is on a cash flow roller coaster ride? One month, your cash flow metrics are soaring, and the next, they’re plummeting.
You’re not alone.
From my experience working with hundreds of clients as a cash flow expert, I’ve seen countless businesses struggle with cash flow challenges, juggling funds to keep their business operations afloat.
Understanding cash movement is the key to avoiding running out of cash to meet your financial obligations.
How do you do that?
By measuring the cash flow metrics that matter.
In this guide, I’ll share my 20+ years of experience as a cash flow expert to help you understand the essential cash flow metrics every small business owner needs to track. Think of these metrics as your financial dashboard—providing crucial information to navigate your business.
By mastering these metrics, you’ll gain the clarity and confidence to steer your business toward greater profitability and stability.
Why Listen to Me?
I’m a cash flow specialist who has helped hundreds of clients improve their cash flow. I’ve shared my expertise on major platforms like QuickBooks Online, Independent, Zoho, and Floatapp. This isn’t just a side hustle; I 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 safe hands. Let’s dive into those metrics and unlock your business’s financial potential!
Key Takeaways
-
- Cash flow metrics: The raw numbers showing cash movement in your business.
- Cash flow KPIs: Performance indicators measuring progress against goals.
- Choosing the right metrics: Crucial for running and expanding your business.
- Monitoring cash flow metrics: Helps you make informed business decisions and avoid cash shortages.
7 Must-Track Cash Flow Metrics for Your UK Business
Now that we’ve covered the basics, let’s dive into the specific metrics you need to track. We’ll use a dental practice as an example, but remember, these concepts apply to any business, whether you’re selling products or services.
1. Cash Inflows
What is it?
Cash inflows are the total amount of cash coming into your business from all sources (sales, investments, loans, etc.).
Why it matters:
Understanding your cash inflows is essential for understanding the sources of your actual cash and managing revenue streams effectively.
Example: A dental practice in the UK receives cash from various sources:
Patient fees: £30,000 from routine check-ups, cleanings, and treatments.
NHS payments: £10,000 from NHS services provided.
Private insurance payments: £5,000 from private dental insurance claims.
Total cash inflows: £45,000
Explanation: These inflows represent the total cash coming into the dental practice. This is essential for understanding where your money is coming from and how to manage those different revenue streams effectively. NHS dental services are a significant source of cash for dental practices in the UK.
2. Cash Outflows
What is it?
Cash outflows are the total amount of cash going out of your business to cover various expenses. This includes everything from your daily operating costs to loan repayments and investments in new equipment.
Why it matters:
Tracking your cash outflows is essential for managing costs and avoiding cash shortages. If you don’t keep a close eye on where your money is going, you could find yourself struggling to pay bills or meet payroll.
Example:
The dental practice has the following cash outflows in a given month:
- Operating expenses: £12,000 for rent, utilities, and staff salaries.
- Medical supplies: £5,000 for dental materials and equipment.
- Equipment maintenance: £2,000 for servicing dental chairs and tools.
- Debt payments: £1,000 for equipment financing.
- Total cash outflows: £20,000
Explanation: By tracking these outflows, the dental practice can identify areas where they might be able to cut costs or negotiate better deals with suppliers. They can also ensure they have enough cash on hand to cover these expenses and avoid any unpleasant surprises.
3. Net Cash Flow
What is it?
Net cash flow is the overall change in your business’s cash position during a specific period. It’s the result of subtracting your total cash outflows from your total cash inflows.
Formula: Net Cash flow = Cash inflows – Cash outflows
Why it matters: Net cash flow is a critical indicator of your business’s overall financial health. A positive net cash flow means you’re bringing in more cash than you’re spending, which is a good sign. A negative net cash flow, on the other hand, indicates that you’re spending more than you’re earning, which could lead to financial difficulties if not addressed.
Example:
Using the dental practice’s cash inflows and outflows from our previous examples:
- Net Cash Flow = £45,000 (Cash Inflows) – £20,000 (Cash Outflows)
- Net Cash Flow = £25,000
Explanation: In this case, the dental practice has a positive net cash flow of £25,000. This means they have £25,000 more cash at the end of the period than they had at the beginning. This is a healthy sign and suggests the practice is managing its finances effectively.
4. Operating Cash Flow (OCF)
What is it?
Operating Cash Flow (OCF), also known as cash flow from operating activities, is the cash generated from your core business activities. It’s the money your business makes from its day-to-day operations, like providing dental services or selling products.
Formula: OCF = Net Income (Net Profit) + Non-Cash Expenses (like depreciation or amortisation) + Changes in Working Capital
Why it matters: OCF is one of the most important cash flow metrics because it shows whether your primary business activities are financially sustainable. It tells you if you’re generating enough cash from your core operations to cover your expenses and invest in future growth, ensuring a healthy cash flow.
Example:
For the dental practice, the OCF calculation might look like this:
- Net Income: £18,000 (profit from dental services)
- Non-Cash Expenses: £1,000 (depreciation of dental equipment)
- Changes in Working Capital: -£2,000 (increase in accounts receivable, meaning less cash collected)
- Operating Cash Flow = £18,000 + £1,000 – £2,000
- Operating Cash Flow = £17,000
Explanation: In this example, the dental practice generated £17,000 in cash from its core operations. This indicates that the practice is generating enough cash to sustain its business activities. Important Note: Non-cash expenses like depreciation are added back to net income because they don’t represent an actual outflow of cash. Changes in working capital reflect adjustments for cash that hasn’t been received or paid yet (like accounts receivable and payable).
5. Free Cash Flow (FCF)
What is it?
Free Cash Flow (FCF) is the cash left over after your business has covered its operating expenses and capital expenditures (money spent on acquiring or maintaining fixed assets, such as equipment or buildings).
Formula: FCF = Operating Cash Flow – Capital Expenditures.
Why it matters:
FCF is a key financial metric indicator of your business’s financial flexibility and its ability to invest in future growth. It represents the cash you have available to:
- Expand your business: Invest in new equipment, technology, or even acquire other businesses.
- Pay down debt: Reduce your financial obligations and improve your creditworthiness.
- Pay dividends: Reward shareholders for their investment.
- Make personal drawings: Take money out of the business for yourself.
Example:
From the dental practice’s OCF:
- Operating Cash Flow: £17,000
- Capital Expenditures: £3,000 for new dental chairs.
- Free Cash Flow £17,000 – £3,000 = £14,000
Explanation: In this example, the dental practice has £14,000 in free cash flow. This means they have £14,000 available to invest in growth, pay down debt, or take as personal drawings after covering their operating expenses and capital expenditures.
6. Cash Flow from Investing Activities
What is it?
Cash flow from investing activities refers to the money your business uses for investments or receives from the sale of assets. This includes activities like:
- Purchasing new equipment or property: Like buying a new dental chair or expanding your office space.
- Selling existing assets: Such as selling old equipment or a company vehicle.
- Making loans to other entities: If you lend money to another business or individual.
- Investments in stocks or bonds: If your business invests in the financial markets.
Why it matters: Cash flow from investing activities shows how your investment decisions impact your cash flow. If you’re investing heavily in growth, you might see a negative cash flow in this category, which is normal. However, it’s important to monitor this metric to ensure you’re not overspending on investments and jeopardizing your overall cash flow.
Example:
The dental practice’s investing activities for the month:
- Purchase of New Equipment: -£3,000 for dental chairs.
- Sale of Old Equipment: +£500 for old dental tools.
- Cash Flow from Investing Activities = -£3,000 + £500= -£2,500
Explanation:
In this example, the dental practice spent more on new equipment than they received from selling old equipment, resulting in a negative cash flow from investing activities. This is not necessarily a bad thing, as it indicates the practice is investing in its future growth. However, it’s important to monitor this metric to ensure they don’t overextend themselves financially.
7. Cash Flow from Financing Activities
What is it?
Cash flow from financing activities tracks the money you raise to fund your business and the money you use to pay back those who financed it. It includes:
- Proceeds from issuing stock or debt: The cash you receive when you sell shares of your company or borrow money.
- Repayments of debt principal: The portion of your loan payments that go towards paying down the original loan amount.
- Dividends paid: Cash payments made to shareholders.
- Owner’s equity investments or withdrawals: Cash you put into the business or take out for personal use.
Why it matters:
Understanding cash flow from financing activities is crucial for assessing your company’s financial structure and its ability to meet its debt obligations. It also shows how your financing choices (equity vs. debt) impact your cash flow.
Example:
For the dental practice, the financing activities include:
- New Loan Received: +£5,000 (for expansion)
- Loan Repayment: -£1,000 (for equipment financing)
- Owner’s Equity Investment: +£2,000.
- Cash Flow from Financing Activities £5,000 – £1,000 + £2,000 = £6,000
Explanation: This metric shows the net impact of financing activities on the practice’s cash flow. In this case, the practice received more cash from financing than it paid out, resulting in a positive cash flow from financing activities.
TIP
Remember, these examples are just a snapshot of one month for a dental practice. The specific cash flow metrics and their values will vary depending on your industry, business size, and stage of growth.
From what I’ve seen working with my clients over the years, you can easily adapt these metrics to your sector. The fundamentals of running a business, whether you’re selling physical products or providing services, remain the same.
How to pick the right cash flow metrics for your business
Now that we’ve explored the key cash flow metrics, you might be wondering, “Which ones should I focus on right now?”
This is a common question I hear from my clients. From my experience working with them over the years, the answer depends on your business’s size, sector, and current circumstances.
Here’s how I approach helping my clients figure out the essential metrics to measure:
- First, I start with Operating Cash Flow (OCF): This is a crucial metric that shows whether your business is generating enough cash to cover working capital and ensure financial stability.
- Then I would look at Free Cash Flow (FCF): If your business requires significant capital investments, FCF becomes even more critical. It shows you how much cash you have left over after covering those investments, giving you a clearer picture of your potential for growth and expansion.
- Then thirdly, I cover Cash Flow from Investing Activities: As your company grows, this metric becomes more relevant. It reveals how your investments in assets like equipment or property impact your overall cash position.
Case Study: Dental Richmond’s Cash Flow Focus
Few days ago, I met one of my clients Dr. Steven Taylor (changed the name and location to protect the identity of my client) who owns a single practice based in Richmond, Surrey doing annual patient income of £675,000 who focuses on cosmetic dentistry.
When we reviewed the cash flow statement I prepared for him, we discovered :
- Operating cash flow : Dental implants and Porcelain represents 83% of cash income. It was the major source of operating cash flow to cover paying lab bills, dental associates, operating lease and staff salaries.
- Free Cash Flow: There was hardly any cash left as free cash flow to -reinvest in the business. Free cash flow metrics as 7.89%.
- Cash Flow From Investing Activities: There were lots of cash outflow every month to pay for equipments. By going through various equipments as the metrics seem high to me, we found that two lease payments were finished in seven months time, giving him much more needed breathing space.
Examples of How Other Different Businesses Prioritize Metrics:
Let me demonstrate the practical aspects of how to prioritize which metrics to track in your case regardless of any sector you operate in, as the concepts are the same.
- If you’re a small business owner like a local bakery shop owner, you should primarily focus on OCF. It’s a straightforward indicator of whether your daily takings are covering expenses and generating a profit.
- If you’re a tech startup, you should put more emphasis on FCF. This helps you understand how much cash is available to fund research and development without relying solely on external financing.
- If you run a manufacturing company, you must monitor both OCF and FCF closely. OCF reflects the health of your production processes, while FCF indicates your ability to invest in new equipment or technology to remain competitive.
TIP: Remember, choosing the right cash flow metrics is about understanding your business’s unique needs and priorities. Don’t be afraid to experiment and adjust your focus as your business evolves.
Best Practices for Managing Cash Flow Metrics
Now that you understand the essential cash flow metrics, let’s talk about how to use them to your advantage. These best practices, honed from my two decades of experience as a cash flow specialist, will help you keep your financial ship sailing smoothly.
- Set a Schedule: Don’t just glance at your metrics once a year. Make it a habit to review them regularly, at least quarterly. This regular check-in helps you spot trends, address issues early, and avoid last-minute surprises.
- Embrace Technology: Leverage the power of accounting software or apps designed to automatically track these metrics. This reduces manual errors, saves you precious time, and gives you instant access to the data you need to make informed decisions. You can also track your cash conversion cycle which is the number of days it takes for your business to convert inventory into actual cash.
- Make Informed Decisions: Your cash flow analysis isn’t just numbers on a page – they’re a treasure trove of insights. Use them to guide your business decisions. For example, a strong cash flow margin might signal it’s time to invest in new equipment or expand your product line.
- Optimize Receivables: Speed up cash inflows by offering incentives for early payment, using invoice factoring, or simply following up on outstanding invoices promptly. Remember, cash in hand is better than promises of payment down the line.
- Manage Payables: Don’t rush to pay bills before they’re due. Strategically manage your payables to maintain a healthy cash flow while avoiding late fees. Finding the right balance here can make a big difference to your cash flow.
- Maintain an Emergency Fund: Unexpected expenses are a fact of business life. Build a cash reserve to act as a buffer during tough times. This “rainy day fund” could be the difference between weathering a storm and capsizing.
If you want to install the ultimate cash flow best practices in your business covering all aspects of cash flow, you can check out this guide.
Here’s what I believe.
Cash flow management is not a one-time task, but an ongoing process. Stay informed, be adaptable, and use the tools and strategies discussed to keep your business’s financial health in check. – Shishir Khadka
Your Next Step
You can create a simple spreadsheet to track your cash flow metrics. If you are pressed for time and efficiency, you can download the cash flow metric spreadsheet I have prepared to get started.
If you run multiple six- and seven-figure businesses, I advise you to purchase cash flow software that speeds up the process of collecting cash flow data and converting it into cash flow metrics. You could also use key performance indicators (KPIs) from your cash flow metrics to monitor your progress and make better financial decisions.
If you want to discuss this topic and share your journey with other small business owners, join my Hungry Cash Flow community.
FREQUENTLY ASKED QUESTIONS
Q: How often should I review my cash flow metrics?
A: Ideally, review your cash flow metrics at least quarterly. This regularity helps you spot trends, manage cash flow effectively, and make timely decisions. However, if your business experiences significant fluctuations or if you’re in a high-growth phase, you might need to review them more frequently, even on a weekly or monthly basis.
Q: What is the quickest way to measure cash flow metrics?
A: The quickest way to measure the cash flow metrics is to prepare a cash flow statement. Using cash flow statement, you can derive various metrics you need to measure on a timely basis.
Q: Is EBITDA a cash flow metric?
A: No, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is not a cash flow metric; it’s a profitability metric, though it has a direct impact on your operating cash flows (OCF). While EBITDA isn’t a direct measure of cash flow, it can provide insights into your business’s potential to generate cash in the future.
Q: What is the difference between Cash flow metrics and Cash flow KPIs?
A: The difference between cash flow metrics and kpis are , cash Flow metrics are the raw numbers that tell you about the cash entering and leaving your business. Whereas cash flow KPIs are the performance indicators. They’re derived from your metrics but are more about measuring your progress against specific goals or benchmarks.
Think of it this way:
Your cash flow metrics are like your car’s dashboard, showing you the speed, fuel level, and engine health — the essential indicators of your journey. On the other hand, cash flow KPIs are more like your GPS, guiding you towards your destination – your business goals. – Shishir Khadka FCCA The Cash Flow Expert
