CASH FLOW TIPS: Craig Alexander Rattray says key performance indicators (KPIs) and ratios give a guide to liquidity

The most important key performance indicator (KPI) is the cash balance and, clearly, the higher this is the better. Similarly, the KPI which calculates the level of cash headroom available is also important. This KPI can be used when a company has an overdraft facility and it shows the amount of cash it is forecasting in excess of the facility limit.

For example, if the cash flow shows £20,000 and the overdraft facility is £100,000 then the headroom is £120,000.

Most of the cash flow ratios are linked to the financial statements and accounts. They compare the company’s cash flows with other categories of the financial statements and accounts. Clearly a higher level of cash flow provides business owners with greater security and confidence and provides an indication of the company’s ability to suffer a decline in trading.

These ratios focus on liquidity and can provide a better indication of the financial position than the profitability of the company.

Some of these ratios include:

  • Cash flow coverage ratio: Calculated as operating cash flows (cash flows from trading) divided by total debt. The aim is to have a high cash flow coverage ratio as it indicates that a company has sufficient cash flow to pay for scheduled principal and interest payments on any debt. The cash flow coverage ratio measures the solvency of a company and demonstrates the ability of the company to use its operating cash flows to pay off its debt.
  • Cash flow margin ratio: Calculated as cash flow from operations divided by sales. This is a more reliable metric than net profit because it provides a clear picture of the amount of cash generated per pound/dollar of sales. This takes the cash flow timings into consideration.
  • Current liability coverage ratio: Calculated as cash flows from operations divided by current liabilities. If this ratio is less than 1:1, a business is not generating enough cash to pay for its immediate obligations (principally trade payables/creditors) and as a result may have difficulty making such payments on time. If less than 1:1 it is usually viewed as an indicator of potential insolvency or at least cash flow issues.

Whilst such ratios are interesting and can provide insight into the trading and cash position of the company’s cash flow, for most owner managed businesses, the focus on the cash position and headroom should be adequate.

Cash Flow Tips appears here every Thursday

Extracted from Mastering Cash Flow For Business Owners by Craig Alexander Rattray and Jeff Borschowa, available on Amazon, priced £6.95

Craig writes a column for Daily Business on alternate Mondays

This article was first published on Daily Business ( on 15 April 2021.


Give yourself headroom by keeping tabs on the KPIs