PLEASE NOTE: the following is an excerpt from "20 Competitive Metrics Every Business Needs to Know," which is now available as a free download here.
Performance Metric: CASH FLOW
Definition: A MEASUREMENT OF THE AMOUNT OF MONEY A COMPANY HAS GENERATED OVER A SPECIFIC PERIOD OF TIME
Importance: Cash flow shows how money moves into a company, how long it stays there, whether or not there is a sufficient amount of it to provide for day-to-day operations, and how it flows out of the company. The challenge is that even “profitable” companies can go broke because they had all their money tied up in assets and couldn’t pay their expenses. This means that no matter what a company is focused on — growth, profitability or value — it can’t survive without adequate cash flow, which is why they say “revenue is vanity, cash flow is sanity.”
Key formulas:
- OPERATING CASH FLOW: cash from operations ÷ current liabilities
- PRICE-TO-CASH FLOW RATIO: share price ÷ (cash from operations ÷ # shares)
- CASH FLOW MARGIN RATIO: cash from operations ÷ net sales
Insight: Cash flow is often overlooked because most companies are primarily focused on revenue and net profit, yet many analysts feel it’s a better indicator of overall financial health because it's much harder to inflate or manipulate.
Goal: GOLDILOCKS ZONE
Links:
THE SECRET TO FORMATTING CASH FLOW PROJECTIONS
10 LIFE-CHANGING CASH FLOW SECRETS
20 COMPETITIVE METRICS EVERY BUSINESS NEEDS TO KNOW
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