Discussion Board Articles–
Written by: Matt H. Evans, CPA, CMA, CFM
All articles can be viewed on the internet at www.exinfm.com/board
Excellence in Financial Management
Cash Flow Ratios
Although not widely used, cash flow ratios can be useful in determining the adequacy
of cash and cash equivalents. Cash flow ratios are used depending upon the critical
needs of cash. For example, if cash is critical to servicing long-term debt, than Cash
Flow to Long-Term Debt would be a good ratio. If liquid assets are critical to meeting
current liabilities, than Cash + Marketable Securities to Current Liabilities would be
useful. Some of the variations for cash flow ratios include:
Cash Flow / Total Debt, Cash Flow / Long-Term Debt, Cash + Marketable Securities
/ Working Capital, Cash + Marketable Securities / Current Liabilities.
Another good cash flow ratio is Operating Cash Flow to Net Income. This ratio shows
the extent to which Net Income is supported by operating cash flows. Cash flow from
operations is calculated by adjusting Net Income for non-cash items, such as
depreciation. Cash flow is reported on the Statement of Cash Flows and cash flow
ratios can be calculated from a complete set of financial statements.
Accounts Receivable Ratio Analysis
Ratio analysis can be used to tell how well you are managing your accounts
receivable. The two most common ratios for accounts receivable are turnover and
number of days in receivables. These ratios are calculated as follows:
Accounts Receivable Turnover = Credit Sales / Average Receivable Balance.
Example: Annual credit sales were $ 400,000, beginning balance for accounts
receivable was $ 55,000 and the yearend balance was $ 45,000. The turnover rate is
8, calculated as follows: Average receivable balance is $ 50,000 ($ 55,000 + $
45,000) / 2. The turnover ratio is $ 400,000 / $ 50,000. This indicates that
receivables were converted over into cash 8 times during the year.
Number of Days in Receivables = 365 Days in the Year / Turnover Ratio. Us