I read a lot about the definition but I can’t really get the hang of it.
Is it the cash that the company is left with at the end of the period? (Meaning the cash in their bank accounts *hypothetically*)
In: 14
I think to understand this metric and why it’s important to the health of the business you also need to understand “turns.” Meaning how long does it take the company to covert to cash. There are a lot of reasons that can lead to a negative cash flow but it doesn’t necessarily mean a struggling business. You could just have longer terms on the receivables side, seasonality to your business, or heavy capex in a given period.
Let’s say you have $100. Deal 1 requires $100 and you will get $105 back at the end of the month. Deal 2 requires that same $100 and you will get $120 back but it will take 6 months.
Deal 2 has higher profit margins but assuming deal 1 is replicable every month, it would result in greater profits over a year.
Just like our own personal household, businesses have a fixed amount of cash. So cash flow/ cash conversion is an important metric to better understand how well the company is allocating its capital.
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