Nerd Moment: Do you know “Listen” & “Silent” uses the same letters…which one applies more in your life?
Your cash conversion ratio is a type of financial management tool that helps your company understand if the amount of revenue generated by your production process is sufficient, given your expenses associated with your process. A basic formula for arriving at the ratio involves identifying your total cash flow results from your operations effort and relating your flow of cash from sales to your expenses that are incurred as part of your goods that led to your sales. The expectation is that your company does generate enough revenue to offset all net expenses and still have enough left to handle obligations like taxes and post your net profit for your business.
In order to determine the cash conversion ratio, the first step is to identify the cash flow generated from your sales during a specified period of time. Once that figure is verified, totaling your costs of production is necessary. This includes expenses such as the costs of maintaining your facility and operating the equipment used in your manufacturing process. These costs are deducted from your cash flow, leaving a figure that is then divided by the amount of EBITA (Earnings Before Interest, Tax and Amortization).