How Financial Ratio Analysis Can Boost Your Cash Flow

Cash flow is the lifeblood of any small to medium-sized business (SMB), yet many companies struggle to optimize it.Delayed payments, inefficient payables management, and slow-moving inventory can trap your cash, leaving you scrambling for operational funds.

That’s where financial ratio analysis comes in. By evaluating key metrics like accounts receivable, accounts payable, and inventory management,  you can identify cash flow bottlenecks and make informed decisions to improve efficiency. In this blog, we’ll explore how financial ratio analysis can unlock trapped cash, optimize your operations, and help you achieve financial excellence.

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Understanding Cash Trapped in Accounts Receivable

Extending payment terms to customers is a common business practice. For example, offering net 30 days allows customers 30 days after a sale to pay their invoice. However, late payments often occur when customers face cash flow shortages, leaving your cash trapped in accounts receivable starting on day 31.

Delayed payments create significant challenges for your business. They can force you to borrow money for daily operations or increase overhead costs as your team sends reminders, makes collection calls, or sends notices. Unfortunately, many businesses don’t know the precise value of the cash that accumulates daily as payments are delayed.

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Becoming a High-Performing Company in Accounts Receivable Collections

Using our BizWell software, your company can calculate how many days it takes to collect delinquent invoices, whether quarterly or annually.

For instance, if your collection ratio score is 60 days, it means that on average, your company takes 60 days to collect payment—even though you originally provided a net-30 term. This delay can have a major impact on your cash flow.

With our financial ratio software, your small to medium-sized business will gain a clear view of the total outstanding amount from delinquent accounts. This insight empowers you to make informed decisions to improve cash flow and reduce reliance on costly collection processes or borrowing. In fact, businesses using BizWell typically see a return on their investment within just three months, earning more than they spend on the software in an entire year.

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Managing Cash Flow in Accounts Payable

Becoming a high-performing company is not just about improving cash inflow from collections—it’s also about optimizing cash outflows in accounts payable. Efficiently managing your payables ensures that bills are paid on time without paying too early, which can create unnecessary cash strain.

Improving cash flow may also involve negotiating better payment terms with suppliers, helping your business maintain liquidity and reduce the scramble for operational funds.

Optimizing Cash Flow in Inventory Management

Inventory management plays a significant role in cash flow optimization. The Cash Conversion Cycle (CCC) measures how long it takes for cash to return to your business after being spent on inventory.

High-performing companies focus on reducing the time it takes to sell inventory and collect payments from customers.

Our ratio analysis software helps you calculate metrics like:

• Average days to sell inventory.
• Cash Conversion Cycle scores.

With these insights, you can improve efficiency, reduce holding costs, and ensure cash flows back into your business faster.

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Understanding the Full Cash Conversion Cycle

The full Cash Conversion Cycle connects your accounts receivable, accounts payable, and inventory metrics into one comprehensive view.

By analyzing these ratios together, you gain valuable insights into how long it takes for cash outflows (inventory purchases) to return as cash inflows (collections). This understanding is critical for optimizing your business's overall financial performance.