Some businesses monitor this number on a daily basis. If cash on hand falls below your target, alarm bells should go off and contingency measures taken.
Continuously monitor how much cash you have on hand and check it against the target set when you did your financial projections. Your quick ratio and your working capital ratio will tell you if you have enough cash on hand to meet short term needs.
2. Cash conversion cycle
Tracking this metric over time will help you identify sources of cash flow problems and measure progress in tightening your cash flow management. The lower this number, the better—it means you have more cash on hand to generate additional returns and/or reduce your line of credit.
To determine your cash conversion cycle take the number of days of inventory outstanding (how long it takes on average to sell your inventory), then add to it the number of days receivable outstanding (how long it takes your customers to pay you), then subtract the number of days payable outstanding (how long it takes you to pay your bills).
Cash conversion cycle
Days inventory outstanding
Days receivable outstanding
Days payable outstanding
3. Gross profit
Gross profit is a great starting point for determining the value of every sale and making pricing and promotion decisions.
It’s important to keep an eye on it since a gradual decline could mean future trouble for your business.
Your gross profit (or gross margin) is the money you make directly from selling products and services, minus the cost of sales. It doesn’t include indirect cost of sales such as rent and marketing.
You can calculate your gross profit as a percentage of revenues using the following formula:
Gross profit margin
Gross profit / Revenues X 100
To learn about more about cash flow management and read real-life entrepreneur stories, download your free copy of BDC’s eBook Master your Cash Flow: A Guide for Entrepreneurs.