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As every CFO knows, cash flow is the lifeblood of an organization. It’s the foundation of salaries, procurement, CAPEX and OPEX, as well as a critical performance metric. And as important as it is to understand your company’s cash flow, understanding your competitor’s cash flow can provide important context.
It can be valuable to know, for instance, that your company spends more per sale than your five closest competitors. Or that your EBITDA doesn’t match up against the company business plan.
Luckily, there’s an easy way to measure benchmark against competition: look at the data. Specifically, there are several KPIs hidden within public financial data that, if used comparatively, can reveal some powerful insights.
Here are four metrics worth their weight in gold:
Free Cash Flow as a Percentage of Sales – To understand how much of a company’s revenue is actually transformed to cash, you can use the ratio of free cash flow to sales. It’s the snapshot of a company’s true liquidity, and helps you understand if your competitor has money available.
Operating Cash Flow to Debt – This is an indication of a company's ability to cover total debt with its yearly cash flow. A high ratio could be a sign of financial strength, while a low one could be a negative sign that indicates too much debt or weak revenue generation.
Quick Ratio – The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the company's liquidity position.
Cash Conversion Cycle – This metric expresses the days it takes a company to convert resources inputs to cash flow, and represents the length of time a firm's cash remains tied up within business operations. It can be especially useful for comparing close competitors, because the company with the lowest CCC is often the one with better management.
Cash Ratio – How quickly can a company repay its short-term debt? Strong cash ratios provide a benchmark to see if your company is better or worse than competitors in its ability to cover liabilities.
There are always insights buried in data. And when you string together these insights, you start to see a picture of your company that can be a powerful tool to set you on a path to greater success. By being able to separate the “cash cows” from the herd, you’ll be able to develop an understanding of what it takes to keep a company alive and liquid.
Emily Huang is the Co-Founder and CEO of idaciti.