Operating Cash Flow Ratios

Are you a small business owner seeking low cost funds to strengthen or grow your business? You should be aware of the financial ratios considered by banks and other lenders. Once you determine these ratios, you’ll know where your business stands.


If you’re in good shape, you might qualify for lower cost funds with longer terms. On the other hand, if you know your financial ratios aren’t where they need to be, you’ll have an idea of what you need to improve your numbers.

Here’s what you need to know about the operating cash flow ratio.

What is an Operating Cash Flow Ratio?

Financial ratios have different functions. Some ratios show the profitability of a business. Others measure the ability of a business to use its operating cash flow to meet its debts.

The operating cash flow ratio is a measure of how well current liabilities are covered by the business cash flow. It measures the number of times a business can pay off current debts with cash generated for the same time period.

According to Investopedia, using cash flow instead of income is considered a more accurate measure. The operating cash flow ratio can gauge a company's liquidity in the short term.

To learn more about cash flow, visit SmartBiz University: Analyzing Cash Flow

How to Calculate Operating Cash Flow Ratio

Use the following formula to determine your operating cash flow:

Operating Cash Flows Ratio = Cash Flows from Operations/Current Liabilities

  • Cash flow from operations looks into the cash inflows and outflows from products and services. This statement shows the changes made in cash, accounts receivables, inventory, depreciation and accounts payable.
  • Current liabilities are a company's debts or obligations that are due within one year. Liabilities that should appear on the balance sheet include short-term debt, accounts payable, accrued liabilities and other similar debts.

How to Interpret Operating Cash Flow Ratios

Low Number = <1

If the operating cash flow ratio for a company is less than 1.0, the company is not generating enough cash to pay off its short-term debt. A low ratio could show a lender that the business needs more capital to remain healthy.

If lenders look past the numbers, they might find that a low ratio isn’t an indication of failing finances. For example, a business might buy a large amount of inventory, compromising cash flow. But the income from that inventory could put the business in better shape than before.

High Number = >1

A high number, over 1.0, shows that a company has generated more cash in a period needed to pay off its current liabilities. This can indicate to lenders that a business can take on a loan and make timely payments while paying other obligations.

Cash Flow Fixes

To improve your operating cash flow ratio, increase your cash flow. This can be challenging. A few ways to strengthen your cash flow include invoicing regularly, implementing late fees and simply cutting back on expenses. The SmartBiz Blog has an article that explains each of these strategies: Cash Flow Fixes for Small Business Owners

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