The Cash Flow Liquidity Ratio (CFLR) is a crucial financial metric that assesses a company’s ability to meet short-term obligations using its available cash and cash equivalents. This ratio helps businesses and investors gauge liquidity strength and financial stability.
Formula
The formula for calculating the Cash Flow Liquidity Ratio is:
CFLR = (Cash + Cash Equivalents + Marketable Securities + Cash Flow from Operations) / Current Liabilities
How to Use
- Enter the values for cash, cash equivalents, marketable securities, cash flow from operations, and current liabilities.
- Click the “Calculate” button to compute the ratio.
- The result will indicate how well the business can cover its short-term debts with its available funds.
Example
If a company has:
- Cash = $50,000
- Cash Equivalents = $20,000
- Marketable Securities = $30,000
- Cash Flow from Operations = $100,000
- Current Liabilities = $75,000
Then, CFLR = (50,000 + 20,000 + 30,000 + 100,000) / 75,000 = 2.67
FAQs
- What does the Cash Flow Liquidity Ratio indicate?
It measures a company’s liquidity by comparing cash resources to current liabilities. - Why is a higher CFLR better?
A higher ratio indicates a strong liquidity position and the ability to meet short-term obligations. - Can CFLR be too high?
Yes, an excessively high ratio may indicate underutilized cash that could be invested for growth. - What is an ideal CFLR value?
A value above 1 is generally considered good, but optimal ratios vary by industry. - How often should a business calculate its CFLR?
It should be calculated regularly, such as quarterly or annually, to monitor financial health. - What happens if CFLR is below 1?
A ratio below 1 suggests that the company may struggle to meet short-term liabilities. - How does CFLR differ from the current ratio?
The current ratio includes all current assets, while CFLR focuses on cash flow and liquid assets. - Does CFLR include inventory?
No, inventory is not included as it is not immediately liquid. - Is CFLR useful for startups?
Yes, it helps startups assess their liquidity position and financial planning. - Can CFLR predict financial distress?
A consistently low CFLR may indicate potential liquidity issues or financial distress. - Does debt affect CFLR?
Yes, higher short-term liabilities can lower the CFLR, impacting liquidity. - Can CFLR be negative?
No, unless liabilities are incorrectly recorded, as cash and equivalents are always non-negative. - How do cash reserves impact CFLR?
Larger cash reserves increase CFLR, providing better liquidity coverage. - What industries have higher CFLRs?
Industries with high cash flow, like tech and financial services, tend to have higher CFLRs. - Can CFLR be used for personal finance?
Yes, individuals can use it to measure their ability to cover short-term expenses. - How does seasonality affect CFLR?
Businesses with seasonal cash flows may see fluctuating CFLR values throughout the year. - Does inflation impact CFLR?
Yes, inflation can affect cash value and liabilities, potentially altering CFLR. - Can a company improve its CFLR?
Yes, by increasing cash reserves, reducing liabilities, or improving cash flow from operations. - What is the main limitation of CFLR?
It only considers liquid assets and may not provide a full picture of financial health. - Is CFLR different from Free Cash Flow?
Yes, Free Cash Flow measures cash left after expenses, while CFLR measures liquidity strength.
Conclusion
The Cash Flow Liquidity Ratio is an essential tool for businesses to assess their ability to meet short-term obligations. Regularly monitoring this ratio helps ensure financial stability and effective cash management.