What Is Cash Flow To Sales Ratio And What Does It Measure?

Last Updated March 29, 2024

There are few, if any, more important business metrics than cash flow. While profit and revenue are good indicators of success, cash flow is perhaps the best indicator of overall business sustainability. Businesses with strong cash flow have cash inflows that outweigh outflows, setting them up for operational success and long-term growth.

If you’re looking to conduct a more comprehensive analysis of your business’s financial standing, calculating your cash flow to sales ratio can be a great determinant for overall cash flow health. Yet, while cash flow is a commonly known and analyzed business metric, the same can’t be said for cash flow to sales ratio, so we’ve put together this guide to walk you through everything you need to know about this helpful ratio.

What Is Cash Flow To Sales Ratio?

The cash flow to sales ratio, also known as the operating cash flow to sales ratio or OCF/sales ratio, shows a business’s current cash flow after all capital expenditures related to sales costs have been subtracted. Essentially, it analyzes operating cash flow against current sales revenue.

How To Calculate Cash Flow To Sales Ratio

The only metrics needed to calculate cash flow to sales ratio are:

• Net sales
• Operating cash flow

If you don’t know how to calculate your operating cash flow, use the following formula:

Operating Cash Flow = Total Cash Received for Sales (cash inflows) – Cash Paid for Operating Expenses (cash outflows)

As a reminder, operating expenses are any ongoing expenses that support daily operations, including expenditures such as employee salaries, marketing efforts, rent, and maintenance.

And remember, the goal for every business should be to avoid periods of prolonged negative cash flow. Therefore, your operating cash flow shown above should be a positive number. If not, your business is in a period of negative cash flow, which you should work to get reverted by increasing cash inflows.

Cash Flow To Sales Ratio Formula

Once you have accounted for your operating cash flow, you can calculate your cash flow to sales ratio using the following formula:

Cash Flow To Sales Ratio = Operating Cash Flow / Net Sales

For example, let’s say your business has an operating cash flow of $300,000 and net sales of $400,000. The cash flow to sales ratio formula would read as follows:

300,000/400,000 = 0.75

Tip: You can easily locate your net sales data by analyzing your three main financial statements: profit & loss statement, balance sheet, and statement of cash flows.

Related: How Are the Three Essential Financial Statements Linked?

Cash Flow To Sales Ratio vs. Cash Flow Margin

Cash flow to sales ratio and cash flow margin are connected, although they are not quite the same. The lone difference between the two metrics lies in how the numbers are expressed. While cash flow to sales ratio is expressed as a number, the cash flow margin is expressed as a percentage.

To demonstrate the difference, take a look at the formula for cash flow margin below:

Cash Flow Margin = (Operating Cash Flow / Net Sales) x 100

Using the example from the cash flow to sales ratio section above, let’s plug in $300,000 for operating cash flow and $400,000 for net sales:

Cash flow margin = (300,000/400,000) x 100 = 75

Here, the cash flow margin is 75%, while the cash flow to sales ratio was 0.75. Therefore, this business would be able to convert 75% of its sales into cash.

If you have your cash flow to sales ratio number on hand, you can find your cash flow margin by simply multiplying that number by 100 and adding a percentage. With this percentage, you can easily estimate what percent of your business’s sales can be converted into cash.

What Is A Good Cash Flow To Sales Ratio?

It’s unreasonable to put a value on what a “good” cash flow to sales ratio might be, as several factors go into determining what is considered a “healthy ratio” for a particular business. Some of those factors include:

• Industry
• Size of the business
• Age of the business

Even though there is no one-size-fits-all cash flow to sales ratio to aim for, generally speaking, the higher the ratio, the better. Being able to convert net sales dollars into immediate cash is a sign of a well-performing business.

Consider the example below:

	Company ABC	Company XYZ
Operating Cash Flow	$500,000	$750,000
Net Sales	$500,000	$500,000
OCF / Sales Ratio	1.0	1.5

Using our formula, we can easily calculate the cash flow to sales ratio for these two companies. Here, Company XYZ has a better OCF/Sales ratio, meaning they can convert more of their sales into immediate cash than Company ABC.

Cash Flow vs. Free Cash Flow

Before wrapping up, it’s important to touch on cash flow vs. free cash flow. You may have heard both terms and assumed they are the same, but they cannot be used interchangeably.

Free cash flow is the money remaining once all the bills have been paid, such as bills for payroll, taxes, insurance, and rent. This differs from cash flow, which simply measures cash inflows vs. cash outflows.

Free cash flow can be found by subtracting capital expenditures from your operating cash flow. The free cash flow formula is below:

Free Cash Flow = Operating Cash Flow – Capital Expenditures

For instance, if your operating cash flow is $750,000 and you have $200,000 in capital expenditures, your free cash flow would equal $550,000.

Free Cash Flow To Sales (FCF-To-Sales) Formula

The free cash flow to sales (FCF-To-Sales) formula has the same purpose as the operating cash flow to sales ratio; both formulas tell you how much of your sales can be converted into cash. However, the FCF-To-Sales formula is slightly different considering free cash flow is different from cash flow.

You can find your free cash flow to sales ratio by using the following formula:

FCF-To-Sales = Free Cash Flow / Net Sales

Just as with the cash flow to sales ratio, a good rule of thumb for the FCF-To-Sales ratio is that the higher the ratio, the better.