You can calculate your CCC by subtracting DPO from your combined DIO and DSO. A CCC combines three metrics:ĭays inventory outstanding (DIO) - the number of days, on average, it takes for your inventory to turn over.ĭays sales outstanding (DSO) - the number of days, on average, it takes to collect your receivables.ĭays payable outstanding (DPO) - the number of days, on average, it takes you to pay your vendors and suppliers. If your business has a longer cash conversion cycle, it may have higher inventory costs, wait longer for customer payments, have insufficient working capital and struggle to pay bills on time. A CCC measures how long it takes your business to turn inventory and other investments into cash flow from sales. Monitoring your cash conversion cycle (CCC) is crucial for navigating inflationary periods. Rising inflation rates mean that businesses are coping with higher commodity prices and longer customer payment terms. Alternatively, it could indicate that you’re saving a buffer for anticipated shortages. If your ratio is more than 1.0, it’s possible that your business isn’t maximizing cash on hand for business growth and smart investments. However, if the ratio stays below 1.0 over time, this could mean that your business is struggling to stay profitable.

If your cash ratio equals 1.0, you have just the right amount to pay off your current liabilities should your business fold. By using only your cash holdings, a cash ratio gives you the most conservative liquidity measurement. Rather than dividing your operating cash flows by your liabilities, a cash ratio divides your cash and cash equivalents by your liabilities.Ĭash and cash equivalents include legal tender, checks, bank drafts and any asset that can be converted into cash quickly (within 90 days). This metric is often used by lenders to determine how much financing you are eligible for. This ensures that you have the cash to cover short-term debts.Ī cash ratio measures your business’s liquidity and its ability to pay off short-term debts. Your current liabilities include debts due within a year - such as accounts payable, bank overdrafts and short-term debts.Īim for an operating cash flow ratio of 1.0 as a minimum. Your operating cash flow ratio is determined by dividing cash flows related to your operations by your current liabilities. The operating cash flow ratio indicates whether you are making enough money from your operations to pay your bills. Because it doesn’t include investment activities or loans, it is a more reliable indicator of your business’s sustainability. This shows you the cash flow from your core business activities. Of the three, the most important metric to monitor is your operating cash flow. Fortunately, you can anticipate and adapt to cash shortages by monitoring cash flow metrics.Ĭonsider using the following metrics and financial statements to track and forecast the amount of money flowing in and out of your business so you can maintain the working capital needed to operate and grow.Ī cash flow statement includes cash flow related to operations, assets and investments. Longer payment timelines often cause cash flow problems, which create obstacles to business sustainability and growth. Additionally, almost a quarter of businesses said that a lack of access to funding negatively impacted their business in the last year - and 30% of those companies cited poor cash flow as the biggest barrier to securing financing. Invoice payment periods have increased by almost a day on average year-over-year for 1,240 global financial decision-makers, according to C2FO’s 2022 Working Capital Survey. Here are the most important cash flow statements and metrics you can use to manage your small to mid–sized company’s working capital.

Cash forecaster