What are the best indicators of a company's cash flow management practices?

1 Operating cash flow ratio

One of the most important metrics to measure a company's cash flow management is the operating cash flow ratio. This ratio compares the cash generated from the core operations of the business to the current liabilities, such as accounts payable, wages, and taxes. The higher the ratio, the better the company is at covering its short-term obligations with its cash flow. A ratio of 1 or more indicates that the company has enough cash to pay its bills, while a ratio below 1 means that the company may face liquidity problems.

2 Cash conversion cycle

Another indicator of a company's cash flow management is the cash conversion cycle. This cycle measures how long it takes for a company to convert its inventory and accounts receivable into cash. The shorter the cycle, the faster the company is at turning its assets into cash and reducing its working capital needs. A long cycle means that the company has a lot of money tied up in inventory and unpaid invoices, which can affect its cash flow and profitability.

3 Free cash flow

Free cash flow is the amount of cash that a company has left after paying for its operating expenses and capital expenditures. It shows how much cash a company can use for growth, debt repayment, dividends, or acquisitions. A positive free cash flow means that the company is generating more cash than it is spending, while a negative free cash flow means that the company is burning more cash than it is making. A consistent and growing free cash flow is a sign of a healthy and sustainable business.

5 Cash runway

Cash runway is the number of months that a company can continue to operate with its current cash balance and cash burn rate. It is a measure of how long a company can survive without raising more money or becoming profitable. Cash runway is calculated by dividing the cash balance by the cash burn rate. A long cash runway means that the company has enough cash to sustain its operations for a while, while a short cash runway means that the company is in urgent need of more funding.

These are some of the best indicators of a company's cash flow management practices that you should pay attention to as a venture capitalist. By analyzing these metrics, you can assess the financial health and performance of a potential investment and make better decisions.