Small Wins

How to be that

financial go-to person

The next time your company or client is worried about whether it will have sufficient cash flow to . . .

·         pay its current liabilities

·         fund its capital investments

·         pay its debts

. . .you can provide the answers–and do it fast.

    All you need to know is a few simple cash flow ratios.

    You can find the numerator for the ratios–cash flow from operations–in two ways: In your company or client’s statement of cash flow, or if none is available, with a simple computation: cash revenues and cash from A/R payments less cash expenses and cash paid for payables. Do not include noncash items such as amortization and depreciation.

1. Ability to pay current liabilities. This is determined through the following short-term liquidity ratio:

    If the ratio is 1.0 or more, the company can meet its current liabilities.

2. Ability to fund capital expenditures. This is determined as follows:

    If the ratio is just 1.0, operations are not generating enough cash to fund investments. The more that the ratio exceeds 1.0, the better.

3. Ability to repay debt. This ratio indicates how many years it would take to repay total debt if all cash flow from operations were devoted to debt repayment. Make adjustments if you are using cash flow from operations for the month or quarter.