The Best Cash Flow KPI

laptop computer on glass-top table

There are many helpful cash flow KPIs that range from relatively simple to complicated.

However, I’d like to focus on the best cash flow KPI (here is a post that explains KPIs if you’d like a primer). By best KPI, I mean the combination of being one of the most simple and the most useful. Read on to learn why you should utilize the best cash flow KPI; the monthly expenses to cash ratio.

The total expenses…

on your monthly profit & loss (P&L) report may not be a complete picture of the total cash outlaid (for instance, you could be servicing loans). Still, it is a quick and easy approximation of total cash needs. If your revenue suddenly dried up, total monthly expenses would quickly tell you how much cash you would need on hand to keep the business operating for the next 30 days. You could call this the “cash cushion” ratio because it indicates the amount of cash needed on hand to service all business expenses in terms of multiple months.

For instance, say you have $100k in total monthly costs, and you’d like to have two months’ worth of expenses on hand in cash at all times. You are saying you would like your monthly expenses to cash (or cash cushion) ratio to be 2, and so you’d want to have $200k in liquid cash in your bank account at all times.

This ratio is then an anchor point…

for your intuition regarding the amount of cash your business needs. You can adjust the ratio number up or down based on projected future cost growth, current profitability, or level of systemic industry risk.

Suppose your future costs are projected to stay consistent, and you are highly and consistently profitable from month to month (with reliable revenue); in that case, you can be more aggressive and have a lower monthly expenses to cash ratio of 1.

Conversely, you may have inconsistent revenue…

(or have a flight risk customer who contributes a large share of monthly revenue) and be gearing up to launch a new product line and cost department. Additionally, your industry may be becoming more competitive due to a recent regulatory change. Now your overall business risk is much higher;  you may want a ratio of 3-6 to be comfortable that you can fully attack and complete business initiatives in the next six months. 

The expenses to cash ratio is extremely valuable…

because it is simple to understand, provides an efficient check against your business intuition, and is dynamic as immediate business conditions change.

If you are unsure whether your monthly expenses are accurate on your P&L or are looking for additional insight, don’t hesitate to contact us.

By Kyle Smith, CPA