Managing Cash Flow

320 Controlling and Analyzing Cash Flow
manner that is intelligent and consistent with the company’s strategic planning. It
shows the company’s interest in future survival and growth and can be seen as a
positive statement about progress and advancement.
CASH FLOW RATIOS—AN OPPORTUNITY
FOR CREATIVE THINKING.
With these basics in mind, the company’s Statement of Cash Flows can be
analyzed with ratios. A generally accepted set of cash flow ratios does not yet
exist, so the company must look at its own operational and financial position and
needs in devising analytical techniques to evaluate its cash flow. Acceptable and
unacceptable results will vary from company to company, but norms will emerge
for the organization based on its specific uses of cash over a three to five year period.
The ratios illustrated below, or modifications of them, can be used to develop
a working cash flow evaluation process for the organization. Most of the ratios
focus on the impact of various measures relative to cash flow from operations,
which is the most significant cash flow element.
There are any number of additional possibilities that could be considered as
well. The major problem is not to come up with additional ratios, but to determine
which of the myriad possibilities make sense for the company. The ratios below
are intended to be idea generators only and should not be construed as a generally
accepted set of ratios. Such a set has yet to be developed.
Ratio
Cash flow from continuing operations to
sales. The amount of operating cash
flows generated by sales—a cash efficiency
measure.
Cash to income ratio. Percentage of
operating income that has been converted
into cash—a measure of cash
conversion
Cash sales to total sales. The amount of
sales immediately converted into
cash—a cash efficiency measure
Reinvestment ratio. The amount of
operating cash flows used for capital
expenditures—a measure of the degree
of capital reinvestment
Method of Calculation
Operating cash flows
Net sales
Operating cash flows
Operating income
Cash sales
Total sales
Purchase of property,
plant & equipment
Operating cash flows