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What is a Cash Flow Ratio?

Understanding the cash flow ratio and how to use it.

A cash flow ratio is a measure of the number of times a company can pay off current debts with cash generated within the same period. A high number, greater than one, indicates that a company has generated more cash in a period than what is needed to pay off its current liabilities.

A cash flow ratio of less than one indicates the opposite—the firm has not generated enough cash to cover its current liabilities. To investors and analysts, a low ratio could mean that the firm needs more capital.

However, there could be many interpretations, not all of which point to poor financial health. For example, a firm may embark on a project that compromises cash flows temporarily but renders substantial rewards in the future.

Looking for a different cash flow term? Click the link below for our Cash Flow Terms hub page.

Have you thought about invoice finance as a cash flow finance solution?

Invoice finance allows you to release cash quickly from your unpaid invoices.

As your lender, we can release up to 90% of your invoices within 24 hours. On payment of the invoice from your customers, we will then release the final amount minus any fees and charges. There are different types of invoice financing options available such as factoring (mainly invoice factoring and debt factoring) and invoice discounting to businesses depending on the situation and the level of control they require in collecting unpaid invoices.

We are an invoice financing company who offer a solution whereby payments are collected on your behalf managed by our team of expert credit controllers so you can focus on running your business. Our confidential invoice discounting solution is offered to businesses who want to maintain their own credit control processes, therefore this remains strictly confidential so your customers are unaware of our involvement.

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What are the different types of Cash Flow Ratios?

Cash flow ratios make a comparison between cash flows and other elements of a financial statement. The larger the amount of cash flow, the better ability the company will have to protect itself in the event of a temporary decline in performance, as well as the ability to pay dividends to investors.

Cash flow ratios are essential in understanding the liquidity of a business. They are especially important when evaluating the companies whose overall cash flow varies significantly from their reported profits.

Some of the most popular cash flow ratios are:

1. Cash flow margin ratio

Calculated as cash flow from operations divided by sales. Cash flow margin ratio is a more reliable metric than net profit, as it gives a much clearer picture of the amount of cash generated per pound of sales.

2. Cash flow to net income

If your cash flow to net income ratio is close to to 1:1, this indicates that your organisation is not engaging in any accounting intended to inflate earnings above cash flows.

3. Cash flow coverage ratio

Ideally this ratio will be as high as possible - calculated as operating cash flow divided by total debt. A high cash flow coverage ratio indicates that your company has sufficient cash flow to pay for any debt as well as the interest payments on that debt.

4. Price to cash flow ratio

Share price divided by the operating cash flow per share. This ratio is qualitatively stronger than the price/earnings ratio, since it uses cash flows instead of reported earnings, which is more difficult for a company to falsify.

5. Current liability coverage ratio

Cash flow from operations divided by current liabilities. With a current liability ratio of less than 1:1, a business is not generating enough cash to pay for its immediate obligations, which is potentially a sign of upcoming bankruptcy.

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The benefits of invoice finance companies such as Novuna Business cash flow

  • Boost your cash flow without having to wait up to 120 days for your customers to pay you

  • Release up to 90% of the invoice straight away, and the final 10% when the invoice is settled

  • Access funds within 24 hours from initial appointment with our revolutionary digital onboarding process

  • Benefit from our in-house credit control processes, allowing you to focus on running your business, instead of chasing clients for payment

  • Six month trial period followed by a rolling contract

Want to understand more Cash Flow Finance terms?

Our Cash Flow Resource Hub has been set up to help SME's with cash flow finance advice, tips and resources to help with their cash flow position.

We explore ways you can begin improving your cash flow situation and start getting your business on track to positive cash flow.

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