How to Evaluate Your Cash Flow Health

Apr 15, 2021 by Daniella Bourguetts

The way you measure your cash flow should always be tied to your business goals and operational needs. Every company has different needs, so it’s only natural that indicators in cash flow statements vary accordingly.

Some approaches may prove more effective than others. In this post we'll discuss different ways to measure your cash flow health, from macro analysis to practical indicators to help you create actionable solutions. 

We’ll start by the indicators we recommend for a macro-level analysis.

How do you analyze cash flow health?

The way you measure your cash flow should always be tied to your business goals and operational needs. Every company has different needs, so it’s only natural that indicators in cash flow statements vary accordingly. However, some approaches may prove more effective than others. In this post we'll discuss different ways to measure your cash flow health, from macro analysis to practical indicators to help you create actionable solutions. 

We’ll start by the indicators we recommend for a macro-level analysis.

Cash flow on a macro level

Sales Numbers

Looking at your sales number is a great first step. You can spot if your sales are dropping, growing, or behaving erratically. Don't just look at monthly or quarterly sales – also be sure to take a look at your compound annual growth rates. A good place to start is by asking yourself these questions: 

  • Is the growth rate healthy?
  • Is the company hemorrhaging cash?
  • Can the company manage this growth?

Revenue per full-time employee

This metric can provide great insight into your company’s operations for actionable solutions.

By evaluating how efficiently your company is operating, you can find all the gaps where employees spend more time than necessary because they don’t have the right tools or resources. 

  • What this doesn’t mean: It's time to let go of employees that aren't pulling their weight.
  • What this really means: Look for ways to make your employees more efficient. Sometimes, it's automating repetitive tasks so they can focus on analyzing data and leveraging it to create more revenue and improve your bottom line.

It’s important for you to have a goalpost while analyzing this metric. Start by benchmarking what your average revenue per FTE is, then design tests to move the needle up or down. This is the perfect time to think outside the box for new approaches to reach a higher level of productivity. 

But remember, you're benchmarking against yourself for trends – not looking at competitors.

Gross Margin

This metric takes a similar approach as sales in the sense that you should be looking to see if it goes up or down. For some companies, gross margins are the telltale of their overall financial health, but this metric is often the hardest one to manage because there are so many factors involved. 

But the truth is, even though managing this number is challenging, if you can't get it under control, you might as well kiss your profits goodbye.

Take special care of your margins. If your margins are tight, then you need to be focused on containing costs and improving your operational efficiency and unit economics.

Profit margin

Profit margins are a crowd favorite. This metric is a strong indicator of your business’s success. And, just like previous metrics, we want to track patterns and behaviors with little negative variation.

As exciting as this metric can be, we need to be sure to keep its limits in mind: 

  • Positive profit doesn't mean your cash flow management is in good health.
  • Negative profit doesn't mean your company has no cash on hand.

It’s more about piecing all the metrics together to get the big picture.

How do you analyze the cash flow statement? (in-depth)

Once you’ve completed the macro-level analysis, you need to start your in-depth analysis.

This will help you have actionable items to improve your company’s cash flow health.

Stable cash flow from operating activities (CFO)

Start by keeping track of your cash flow from operating activities over a period of time. If it’s steady over the years, then it’s a good sign. If the line’s erratic with major spikes and dips, then you might want to look at the core business.

Here are some key things to ask yourself:

  1. Is your product or service failing to compete in the current market?
  2. Is your salesforce performance unpredictable?
  3. Is your overhead increasing?

Cash flow from operating activities / sales ratio (CFO / Sales)

Next, take a look at the trend of cash flow from operating activities divided by sales.  Ideally, you want to see CFO (Cash Flow Operations) increasing steadily while your CFO / Sales ratio remains stable. If CFO is increasing but CFO / sales ratio is declining, then you should look more closely at your cost of goods and general expenses.

Managing debt using cash flow from financing

It’s all about keeping a balance:

  • If you have surplus cash, it’s good to pay off a debt faster. Reducing debt helps create a cushion.
  • Avoid using all your extra cash to repay debts if you’re sacrificing growth.

CFF to CFO ratio


This one is easy. Never have too much CFF (Cash Flow from Financing) and not enough CFO.

Here’s a simple way to look at it:

  • It’s a good sign if your cash flow continues to grow while CFO declines.
  • It’s a bad sign if you're taking on so many expenses while you're relying on borrowed funds.

Free cash flow (FCF)

We use FCF to measure the net amount of money available to use in the company. Ideally, you want this metric to be trending upward in a sustainable way.

Ending cash available

The final thing to analyze is the cash available. A common best practice is to have at least 3 months of cash as a cushion to cover mandatory payments regardless of the income your business is having.  

As we’ve mentioned before, it’s all about keeping the balance. Some experts might say that too much parked cash could be put to better use by employing it to drive business growth, but that’s completely up to you and how to manage the need to have a on-hand cash cushion in case of eventualities without blocking your company’s growth.  

To Sum Up

Taking the time to do a high-level analysis can help you see where financial problems may arise in your company. It’s a perfect tool for decision making if you complement it with actionable solutions that can be worked using an in-depth analysis.

Luckily, financial teams now have a catalog of digital tools for creating quick reports in real-time. AR automation tools such as Paystand can be a great ally for keeping your expenses fully tracked for strategic decision processes. If you want to know how Paystand can help your AR team create accurate and fast reports, just talk book a call with one of our AR experts today.


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