One way businesses asses profitability is through their cash flow margins. You can determine how strong your sales process and products are through a calculation that takes seconds to complete.

Calculating operating cash flow margins routinely is a valuable practice for companies of all sizes. To calculate your operating cash flow margin, divide your operating cash flow by the sum of your net sales. Confirming these percentages equips you to better understand how your business’s products or services become earnings and also to identify strategies for improvement.

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What is an Operating Cash Flow Margin?

Decision-makers rely on operating cash flow margins to gauge how capable a business is of building a profit. Calculating your business’s operating cash flow margin requires you to review operating activities.

Your business’s accounting department compiles a list of operating activities on monthly statements. Most organizations profit from selling goods and services, financing or investing. Cash flow details show executives whether their company’s offerings produce more revenue than it costs to manufacture the goods or provide services for clients.

How Are Operating Cash Flow Margins Used?

Executives should use operating cash flow margins to influence the decision-making process. Seeing how much money the offered products or services generate compared to company costs tells decision-makers when it is appropriate to develop new merchandise, hire new employees, expand marketing operations or scale efforts back.

Operating cash flow margins communicate whether your business model is feasible. When a business is unable to generate adequate profit from the merchandise or services offered, the company will struggle to repay debts. In most scenarios, the smaller a company’s operating cash flow margin is, the less profitable the brand becomes.

Temporary Operating Cash Flow Dips

Operating cash flow margins are useful for seeking out areas for potential improvement. You might notice decreasing cash flow margins, indicating a liquidity issue. A slow-falling operating cash flow margin may also signal that it is necessary to adjust the way you manage costs for production or advertising.

A temporary decrease in a business’s operating cash flow margin can level out. For example, events like expanding your company’s building or acquiring another business may result in a short-term dip. These situations do not require emergency response efforts. However, your team should investigate what exactly is causing cash flow margins to fall.

What Does a Good Cash Flow Margin Look Like?

What qualifies as an optimal cash flow margin depends on your industry. While there is no precise number all companies should strive to achieve, a solid cash flow margin ratio is generally above 50%. Your company should record a ratio of around 60% to stay profitable.

Operating Cash Flow Margin vs. Operating Margin

A business’s operating cash flow margin differs from the operating margin. A company’s operating margin comprises its amortization costs and depreciation, whereas operating cash flow margins add back expenses mentioned on an income statement. No cash transaction is necessary. The most common example of a noncash transaction is depreciation.

The operating cash flow margin is determined by dividing your operating cash flow by your company’s net sales. Calculating the operating margin requires dividing your operating income by your business’s total revenue. The operating margin measures how much money a company makes on every dollar of sales once variable costs are covered. This margin also includes the costs incurred for production, paying workers or buying raw materials.

A higher percentage ratio is ideal for both operating cash flow margins and operating margins. This number shows that a business’s operations are effective and the brand is successful at converting sales into profits.

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How to Calculate Operating Cash Flow Margin

A business’s operating cash flow margin encompasses its net income, working capital, sales and noncash expenses. Find your company’s operating cash flow by adding your net income, noncash expenses and change in working capital and dividing that sum by your net sales.

Your net income is the revenue you make after subtracting expenses. Noncash expenses should include depreciation and amortization. Finally, your working capital is found by subtracting current business liabilities from the sum of any assets you have.

Use the step-by-step instructions below to use the cash flow margin formula yourself for free:

  1. Find the cash flow from your business’s operating activities.
  2. Determine your net revenue.
  3. Divide the operating cash flow by your net revenue.
  4. Take your findings and multiply the number by 100 to see the percentage.

Where to Find Increments for Your Calculation

No calculations are necessary to find the cash flow from your business’s operating activities or net revenue. These numbers appear on accounting cash flow statements and income statements. Once you’re aware of your operating cash flow margin, you can make more informed decisions and develop your next strategic plan.