Operating Cash Flow Margin Examples
Understanding cash flow margins is easier with concrete examples. If you’re new to using this free cash flow margin calculation method, review the passages below to see these strategies in practice.
Operating Cash Flow Margin Example 1
We will analyze the operating cash flow margin for Company X. In 2021, Company X made a net income of $600,000, and their noncash expenses were $30,000. The previous year, the business earned a working capital of $250,000. However, their working capital increased to $275,000, resulting in a change of $25,000. Company X showed sales of $850,000.
Company X’s operating cash flow can be calculated through the formula as follows:
- ($600,000 + $30,000 + $25,000) / $850,000 = 0.77 x 100 = 77%
As mentioned previously, Company X should strive for an operating cash flow margin of around 60% to be considered highly profitable. At 77%, Company X is doing extremely well with profits.
Operating Cash Flow Margin Example 2
This example will focus on data from Company Y. This business earned a net income of $450,000 and recorded its noncash expenses as $50,000 in 2020. For 2019, Company Y recorded a working capital of $150,000. The working capital for Company Y grew to $155,000 this year — a $5,000 increase. Company Y’s total sales made up $750,000.
The operating cash flow formula can be used for Company Y as follows:
- ($450,000 + $50,000 + $5,000) / $750,000 = 0.67 x 100 = 67%
Company Y’s operating cash flow margin is in the target area of where it should be.
Operating Cash Flow Margin Example 3
Consider these financial details from Company Z. The company recorded a net income of $300,000 and saw $100,000 in noncash expenses during 2019. Company Z noted a working capital reaching $100,000 in 2018. Company Z’s working capital was $102,000 for this year, meaning there was a $2,000 gain. Sales for the year add up to $900,000.
Note the operating cash flow for Company Z below:
- (300,000 + 100,000 + $2,000 / $900,000 = 0.47 x 100 = 47%
At 47%, the operating cash flow for Company Z could use some improvement compared to Company X and Company Y, which are both above 60%.
When to Use Cash Flow Margin Analysis
Once you calculate your cash flow margin, you can begin interpreting the results. The percentage will tell you how efficient your current business strategy is and help you determine what changes are necessary for improvement.
When your sales revenue appears consistent without frequent returns, your net profit margin is where it should be. A percentage above 60% indicates that your company is turning sales into profits and that all expenses have been addressed.
Low cash flow percentages signal a need to readjust your company’s focus. These low percentages can be temporary in cases where your business purchases new equipment, vehicles or supplies. Your company should complete routine cash flow margin analysis. The percentages you calculate show how your company is performing on a larger scale.
Ways to Potentially Improve Operating Cash Flow
Finding patterns across income statements and purchase reports is a proactive way to identify areas in which you can boost your company’s cash flow margin. Consider these methods to improve operations and keep your business profitable:
- Increase or decrease the cost of your goods or services.
- Research your options for suppliers to save money when possible.
- Provide user-friendly payment options for clients to receive your payments on time.
- Incorporate late payment penalty fees for clients who fail to pay regularly.
- Rent or lease machines or equipment to complete your daily tasks at a lower cost than buying.
- Partner with an invoice factoring company to support your business’s cash flow when you need it.
Choose Porter Capital Corporation for Invoice Factoring Services
Invoice factoring is a practical solution for businesses experiencing cash flow issues. If your business struggled while waiting for invoice payments to arrive, work with Porter Capital to receive your money within 24 hours. We buy out invoices from your clients so that you can see 85-95% of the invoice value quickly.
Whether your company needs new equipment, is short on funds to pay employees or has bills to cover, we provide funding for all the ways you do business. Our company has three decades of experience in the financial industry, so we have the expertise to eliminate obstacles and help your business grow accordingly. You can reach out to Porter Capital to get started with our invoice factoring services.