Cash flow to sales ratio

What is the Cash Flow to Sales Ratio?

The cash flow to sales ratio reveals the ability of a business to generate cash flow in proportion to its sales volume . It is calculated by dividing operating cash flows by net sales . The operating cash flows information can be extracted from a firm’s statement of cash flows , while its net sales can be found near the top of its income statement .

Ideally, the ratio should stay about the same as sales increase. If the ratio declines, it can be an indicator of a number of problems, such as:

The firm is pursuing incremental sales that are generating a smaller amount of cash.
The firm is offering incremental customers longer payment terms, so that cash is tied up in accounts receivable .
The firm must invest in more overhead as its sales increase, thereby reducing the rate of growth in cash flow.

All of these issues can indicate that a business is growing its sales at the expense of declining cash flows.