Cash flow ratios are particularly important for the financial analysis of the business.
1.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 positivealbeit what is ‘good’ will vary depending on the industry.
Current assets/current liabilities
2.Debtor days – the number of days it takes on average for customers to pay you.
Trade debtors/sales*365
3.Creditor days – the number of days it takes for you to pay your suppliers on average.
Trade creditors/purchases*365
4.Stock days – the number of days on average that stock is held before it is sold.
Stock/purchases*365
5.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 compareyourself to others in your industry.
