What Cash Flow KPIs Should Business Owners Track?

7 min read

April 23rd, 2025

Cash flow problems are the leading reasons why businesses fail (by a long shot). According to a study from U.S. Bank, 82% of failed businesses went out of business as a result of cash flow challenges.

So, understanding how to use key performance indicators (KPIs) to analyze your business's cash flow and manage it well is vital to staying open, operational, and achieving success. 

What Is Cash Flow?

Cash flow is the money flowing in and the money flowing out of a business. Typically, it is assessed and tracked using a cash flow statement which reports an entity's cash flow over a given period of time. 

Types of Cash Flow

• Net Cash Flow = Total Cash Inflows - Total Cash Outflows
  • Calculates the overall change in a business's cash balance, considering all sources.
• Operating Cash Flow = Net Income + Non-Cash Expenses - Increase in Working Capital
  • Calculates the cash flow generated by the business's core functions. 
• Free Cash Flow = Operating Cash Flow - Capital Expenditures
  • Calculates the amount of remaining cash after all operating expenditures and investments in capital expenditures have been covered (i.e. disposable cash). 
• Cash Flow From Financing Activities = Cash Inflows From Equity - (Cash Paid as Dividends - Repurchase of Debt and Equity)
  • Calculates cash flow from sources such as investors, creditors, and owners. 
• Cash Flow From Investing Activities = Purchase of Property + Purchase of Equipment + Purchase of Other Businesses + Purchase of Marketable Securities - Divestitures
  • Calculates cash flow from capital or long-term investments (stocks, securities, businesses, equipment, or property)

Understanding Cash Flow Management

Cash flow management focuses on ensuring that accounts payable and accounts receivable work in a well-balanced dance so your business gets paid in a timely manner and has the money it needs for impeccable payables management. Cash flow management also involves routinely forecasting cash flow, analyzing all of the types of cash flow relevant to your business (especially free cash flow analysis), and tracking a variety of cash flow metrics such as business liquidity ratios that can help you actively work to strengthen cash flow in your business. 

Profit vs. Cash Flow: Why a Profitable Business Can Still Encounter Cash Flow Challenges

On a basic level, profits equal your total sales revenue after total expenses have been deducted. A business with strong profit margins can still encounter cash flow problems — even though the business will ultimately end up in the black — as a result of payment timing issues. 

For example, if a company invests a large chunk of free cash into a project, it could wind up with a negative cash flow during the period of working to deliver services and waiting for the client to remit payment for their invoice. If payment doesn't arrive until the following financial period, then the current financial period could reflect a negative cash flow, despite the business's ultimate profitability. This could leave the company without enough free cash available to cover overhead expenses while waiting to get paid. 

Read More: The Pros and Cons of Outsourced Accounting Services for Businesses

9 Vital Key Performance Indicators for Cash Flow

These small business financial metrics can help you take your cash flow from teetering on the edge of terrifying to well-managed, under control, and consistently strong. 

1. (2., 3., and 4.) The Cash Conversion Cycle (CCC)

Cash Conversion Cycle = Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding

Do you know how long it takes your company to convert investments into products or services and back into cash resources after sales? This process is known as the cash conversion cycle, and it's key to understanding the speed of your business's operations and cash flow.

The cash conversion cycle is really a three-part cash flow metric, as calculating your CCC requires three separate KPIs:

• Days Inventory Outstanding (DIO) - In a commodity business, this metric measures how long products are held onto before being sold. In service-based businesses, this metric is slightly less tangible, as it refers to the typical client turnaround time. It can be used to track the time needed to complete the delivery of a service or the time needed to develop a service before it's available to clients. 
  • DIO = (Average Inventory / Cost of Goods Sold) x Number of Days in the Period
• Days Sales Outstanding (DSO) - DSO is the average time it takes to collect payment from your clients after providing a service. For better cash flow, you want to aim for the shortest DSO possible. Requiring down payments, payments upfront, and offering early payment incentives can help to improve DSO. 
  • DSO = (Average Accounts Receivable / Total Sales) x Number of Days in the Period
• Days Payable Outstanding (DPO) - DPO is the average time it takes your business to pay its vendors, suppliers, or creditors. Taking longer to pay can help increase your cash flow. Paying early to take advantage of early payment discounts can also help to improve your cash flow. The goal is to optimize payables to maximize the amount of free cash your business holds and the amount of time it holds onto its cash. 
  • DPO = (Accounts Payable / Cost of Goods Sold) x Number of Days in the Period

Considered individually, each of these KPIs is a useful tool for identifying and addressing cash flow weaknesses. Used together to calculate your CCC, they help you better evaluate the overall speed of your business's cash flow. You can work on manipulating the numbers to determine which aspect of operations will have the biggest impact as a result of efficiency improvements. 

5. Accounts Receivable Turnover Ratio (ART)

ART = Net Annual Credit Sales / Average Accounts Receivable

While DSO measures the average time it takes to collect payments, ART measures how often payments are collected. The higher the ratio, the more often your business is collecting payments from clients, while a low ratio likely indicates that your clients are paying too slowly. 

6. Accounts Payable Turnover Ratio (APT)

APT = Net Credit Purchases or Cost of Goods Sold / Average Accounts Payable

Business leaders can use the APT ratio to determine the number of times over any given financial period that creditors were paid and the company's accounts payable turned over.

This is calculated using either the company's total cost of goods or its net credit purchases divided by the average accounts payable balance for that period. (To determine the average accounts payable, simply add the balance from the beginning of the period to the balance at the end of the period and divide by two.) 

APT is most valuable when compared from period to period, helping you determine your ability to pay your bills on time and maintain good professional relationships. 

7. Operating Cash Flow Ratio 

Operating Cash Flow Ratio = Cash Flow From Operations / Current Liabilities

This valuable liquidity ratio helps you rapidly assess short-term liquidity. The ratio helps you evaluate your business's ability to pay its current liabilities with the cash generated from its core business activities. 

Read More: Financial Reports vs. Management Reports: What’s the Difference?

8. Cash Runway

Cash Runway = Current Cash Balance / Monthly Burn Rate

For startups and small businesses, the cash runway is one of the most important metrics to measure because it shows you how long your business can survive with normal operations and no cash inflow before it runs out of cash. Knowing your cash runway can help you identify cash flow shortages before they occur, talk to investors and creditors before you're in an immediate emergency, and improve your short-term and long-term spending plans. 

9. Cash Flow Forecast Variance

Cash Flow Forecast Variance = Actual Cash Flow - Forecasted Cash Flow

Cash Flow Forecast Variance Rate = ((Actual CF - Forecasted CF) / Forecasted Cash Flow) x 100

Businesses responsibly managing cash flow should be actively forecasting cash flow. You can effectively evaluate your business's cash flow performance by comparing your actual numbers to your forecast. By continuously comparing these numbers each period, you can improve your forecasts and performance by analyzing the variances and making operational or budgetary adjustments. 

Automate Data Collection, Streamline Reporting, and Access Real-Time Cash Flow KPIs With an Outsourced Back Office

As your business grows, it's going to experience increasing costs as your variable expenses are directly linked to sales numbers and overhead costs increase incrementally as you scale your business. Plus, as your client list grows, you'll face more and more challenges with invoicing and collecting payment in a timely manner. As a result, cash flow management only becomes increasingly difficult. Since your business's viability and success directly depend on the health of your cash, it's imperative that you establish a sound, high-functioning back office that automates data collection, increases accuracy, and improves financial report reliability. 

With an experienced outsourced accounting provider, you can implement the tools and technology needed to ensure you have reliable financial information that you can use to make data-driven decisions that will improve your cash flow and strengthen your company's financial health.