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The Cash Flow Margin measures how well company operations are at creating cash from sales of their products and services.[sc:kit02 ]
Cash Flow Margin Formula
Explanation of Cash Flow Margin
Also called Operating Cash Flow Margin and Margin Ratio, the Cash Flow Margin measures how well a company’s daily operations can transform sales of their products and services into cash. A key profitability ratio, relating Cash Flow from Operations to Net Sales provides powerful view into the inner workings of a company using two crucial measures of company performance.
Importance of Cash Flow Margin
Cash is what a company needs to generate to pay its expenses and purchase assets, and how well a company can convert sales into cash is crucial. Knowing that a company is continually improving its Cash Flow Margin is extremely valuable and is a key indicator of performance.
Companies that end up generating a negative cash flow are losing money as they generate sales and any company cannot keep this up over an extended period of time. With a negative cash flow, the company will have to rely on cash reserves or take on more debt as they continue the business.
You may have heard the slang term “burn-rate” or “runway”, both of which are often used to describe a company operating with negative cash flows. A company in this situation would be “burning” through its cash reserves, with their limited of funds available. Much like an airplane attempting to take off, the company also has a finite “runway” left before they need to reach a position of positive cash flow.