Key Cash Flow KPI’s for Improving Working Capital

Cash flow is the life blood of every business – without it everything comes to a grinding halt.

While many businesses review their profitability with department managers on a monthly basis to improve performance, cash flow and working capital forecasting often only becomes a priority when money gets tight.  To improve working capital, cash flow KPI’s should be incorporated into management reports and reviewed by department managers on a monthly basis.

Working Capital


It is imperative that a business maintains a minimum cash position that ensures the organisation has enough liquidity to meet its financial commitments.

These commitments include payments to suppliers for inventory and operational expenses, payments to staff for salary and wages, payments to the ATO for PAYG and GST and payments to banks and finance companies for loan repayments.

In industries where cash flow can be volatile or irregular it makes sense to build in a “cash buffer” that can help a business endure economic downturns and reduce financial stress.

It is important that bank accounts are reconciled on a regular timely basis (preferably daily) so that a business’s cash position can be ascertained quickly if required.

Key Ratios

Quick Ratio (Cash + Cash Equivalents + Debtors) / Current Liabilities  –  the higher the ratio – the greater the organisations liquidity.

Current Ratio  –  Current Assets / Current Liabilities  –  This should be at least 1:1 – anything less may indicate a shortage of funds.

It is important to note that these ratios may be skewed if there are large amounts of bad or doubtful debts or obsolete stock that need to be written off.



When things start to get tight, creditors are usually the first to feel the pain with delays to payments.  With the increasing use of electronic payments it’s harder to use the excuse “the cheque is in the mail”.  Delayed payments can lead to tighter credit restrictions and issues with stock ordering.  If you start receiving complaints about accounts payable – it is time to review your cash position and forecast.

Key Ratios

Aged Creditors – percentage of overdue creditors segmented by 30, 60 and 90+ days.

Creditors Days to Pay – average number of days to pay suppliers.



All businesses should have clear inventory KPI’s and stock policies that take into account current economic supply and demand and organisational sales targets.   Excess inventory can occur when economic conditions deteriorate leading to a reduction in sales volumes, which in turn ties up working capital and may create physical storage issues.  In addition to overall stock levels it is also important to review stock mix to ensure that the business has the right levels of stock on an individual or segmented stock basis to meet customer demand.

Key Ratios

Aged Stock– Aged Stock / Total Stock

Stock Turnover – Average Stock on Hand / Average Cost of Goods Sold



Accounts receivable is one of the first places to look if you need to improve your cash position quickly.  Documented policies regarding opening accounts, extensions of credit and debtors follow up provide the foundation for minimising outstanding debts.

Work in progress and unvoiced work is another area that must be reviewed regularly to maximise revenue and working capital.

Key Ratios

Aged Debtors – percentage of overdue debtors segmented by 30, 60 and 90+ days.

Debtors Days to Pay – average number of days for debtors to pay.

Work In Progress Days – average number of days for WIP.

Incorporating Cash Flow KPI’s into the monthly management review process will ensure that department managers have a focus on improving their stock ordering, stock management and customer invoicing processes.  Always having enough working capital is one of the keys to business survival.

Mark Stonebridge

SME Business Coach

Bridge the Gap between Planning and Performance

Cash Flow

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