5 useful ratios for monitoring cash management

Cash flow ratios are particularly important for the financial analysis of the business.

Current ratio – a measure of liquidity and measures a company’s ability to meet its

short-term obligations i.e., amounts due less than 1 year.  This should be positive

albeit what is ‘good’ will vary depending on the industry.

Current assets/current liabilities

Debtor days – the number of days it takes on average for customers to pay you.

Trade debtors/sales*365

Creditor days – the number of days it takes for you to pay your suppliers on

average

Trade creditors/purchases*365

Stock days – the number of days on average that stock is held before it is sold.

Stock/purchases*365

Working capital cycle – the number of days to complete a cycle from paying

suppliers to receiving cash on a sale. Ideally, this should be as short as possible to

ensure cash is constantly coming back into the business in a timely fashion to

reinvest. 

Stock days + debtor days – creditor days

These ratios provide a useful basis for comparison against previous performance to allow for action to address issues as and when they arise. It is also useful to compare

yourself to others in your industry.