Test Cash Flow Performance Glossary

What is the cash flow margin?

The cash flow margin is a profitability metric that represents the proportion of cash generated from sales. In other words, it demonstrates how well your business can convert its sales into cash. The cash flow margin reflects the efficiency with which a company turns its revenue into total cash flow. In contrast to net income, which can be affected by non-cash transactions such as depreciation and amortization, cash flow margin concentrates on the actual cash transactions occurring within your business.

Why is the cash flow margin important?

Getting to grips with your cash flow margin analysis will provide you with insights into your business profitability.

Additionally, it will provide your business with the following positive outcomes:

• A good measure of profitability: Cash flow margin can give you clarity on your business's liquidity by showing the proportion of sales revenue that is converted into cash.
• Your operational efficiency: A high cash flow margin measures your operating activities and whether your receivables and payables are being managed effectively.
• Assessing your financial health: This operating margin helps in assessing the overall financial health and sustainability of your business by focusing on actual cash generation.
• Investor and creditor confidence: Strong cash flow margins can improve your credibility with investors and creditors, making it easier to secure financing activities.