Optimizing Cash Flow for Small Business #4 Metrics

Intro: Cash Flow Cycle Explained | 1. Onboarding | 2. Invoicing | 3. Vendors | 4. Metrics | 5. Accounts Receivable Problems

Welcome back to Optimizing Cash Flow, our series of short videos to help small business owners make their cash flow in the right direction. My name is David Worrell from Fuse Financial Partners. Today we’re going over the metrics of cash flow. We’re going to teach you a little bit of math today. I’m sorry, I hope you’re ready for that. It won’t be tough. There is no quiz. We are going to show you a couple of ratios that you will need to determine where your company is at, from a balance sheet perspective, on the cash flow scale.

Let’s get right to it.

We’re going to go over a couple of debt ratios. I’ve got the math on the board.

1.  The first is called total liabilities / total assets. For that you need your balance sheet. Go down the right side of your balance sheet until you see the line for total liabilities. Divide that by the next number which is total assets, and you’ll get a ratio. You can express it as ‘A’ is about the highest that the ratio should ever go. The lower the better. You really want less liabilities and more assets. Don’t let your liabilities over assets ratio get above point 4. If you see that it’s up there, maybe it’s surpassed point 4, start to consider refinancing debt. Paying off your loans a little more quickly, liquidating some assets to pay debt; anything you do to get that ratio under control is going to be helpful for your cash flow in the long term.

2.  There’s one other ratio that you should look at and that is total debt service over income. I can’t give you a hard and fast rule for what this number should be, it’s a little bit different for every business. We’re talking about the cash you send to a to pay off a loan each month, over the total amount of income you make each month. Maybe 20% is the most that number should ever be. It’s different for every business. Calculate how much money you send to your credit cards, bank loans, car loans, whatever it might be divided by the total income during that same period. Start to track that number. Keep it as low as possible.

3.  Finally, we’ll talk about tracking those numbers over the long term. Measure the ratios, note trends. Write them down. I have a great story about the giant piece of newsprint I used to hang on the back of the door in my office. Each week or each month, measure accounts payable and accounts receivable, liabilities over assets and total debt service. Plot them using a handful of crayons and markers. Plot where the ratios stand each week, so that you can begin to see the trend lines. You always want to set a goal and make sure the trend lines are going towards your goal, otherwise you need to take some action.

I hope that’s helpful. It’s a bit of math that will tell you what’s going on inside your company. Join us for the next segment of Optimizing Cash Flow.  I’m David Worrell from Fuse Financial Partners.

Thanks for watching.


Intro: Cash Flow Cycle Explained | 1. Onboarding | 2. Invoicing | 3. Vendors | 4. Metrics | 5. Accounts Receivable Problems


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