Understanding the Operating Cash Flow to Sales Ratio

In my last posting I defined what operating cash flow is and how to calculate it. Now I want to see it in relation to sales.

Why in Relation to Sales

Since selling is the primary activity of a company for producing cash flow, the relationship of operating cash flow to sales is a meaningful one.

Operating Cash Flow to Sales Ratio Defined

To calculate the operating cash flow to sales ratio, which is expressed as a percentage, the following formula is used (where OCF stands for operating cash flow):

Operating Cash Flow to Sales Ratio = OCF / Sales

An Example

Assume a company’s annual sales are $5,375,000. Also use the example for calculating operating cash flow below.
calculating operating cash flowWith the above information we can calculate the operating cash flow to sales ratio as follows:

Operating Cash Flow to Sales Ratio = OCF / Sales

Operating Cash Flow to Sales Ratio = $156,815 / $5,375,000

Operating Cash Flow to Sales Ratio = 2.9%

As you can see, not much cash flow is being produced in relation to sales.

What the Ratio Means

Essentially this calculation demonstrates how good a job a company is doing converting its sales activity to cash. The higher this ratio is, the better this performance metric.

Are you measuring your operating cash flow to sales ratio to see how effective your company is at converting its primary activity, sales, to cash?

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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