What it means
The calculation divides sales for the year by cash and cash equivalents, usually the average balance rather than a single year end snapshot. The result is an efficiency measure: a high number means a small cash balance is supporting a large volume of trade, while a low number means a lot of cash is sitting still relative to the business being done.
It is one of a family of ratios that test how hard each part of the balance sheet is working. Cash is the safest asset a business can hold and also the least productive, since money in a current account earns little and buys nothing.
Boards use this ratio to spot both problems: a company hoarding cash that could fund growth or be returned to shareholders, and a company operating on such a thin balance that a single late paying customer creates a crisis. Reading the number requires knowing the business model.
A supermarket collecting cash at the till and paying suppliers 60 days later can run a very high ratio safely, while a project based engineering firm with lumpy receipts needs a much larger buffer and will show a lower ratio. Comparison is only meaningful against the same company over time or against direct competitors.
A useful way to make the ratio intuitive is to invert it into days. Dividing 365 by the ratio gives the number of days of sales the cash balance represents, which is easier to discuss with people who do not work with ratios every day.
The obvious weakness is that a single year end figure can be managed. A business that delays supplier payments over the year end will show a flattering cash balance and a distorted ratio, which is why an average of monthly balances is far more reliable than the closing number.
In practice
Real-world examples.
Example
A fast food franchise operator shows a sales to cash ratio of 30, reflecting daily card receipts and supplier terms of 45 days. Its bank is comfortable because the business collects before it pays rather than the other way round.
Example
A civil engineering contractor runs a ratio of 4, holding roughly 90 days of sales in cash. The finance director defends the position because a single delayed milestone payment on a large contract can exceed a month of costs.
Example
A family owned printing business shows a ratio that has fallen from 18 to 7 over three years as cash built up after a property sale. The board decides to use part of the balance to repay a term loan rather than let it sit idle.
Think of it
“Sales to cash shows how many sales dollars each cash dollar supports.
Formula
Calculation
Sales to cash ratio = annual net sales / cash and cash equivalents
Cash as days of sales = cash and cash equivalents / annual net sales x 365
A specialist retailer records net sales of $9,600,000 for the year and holds an average cash balance of $800,000 across the twelve months.
Sales to cash ratio = $9,600,000 / $800,000 = 12.0.
Turning that into days, $800,000 / $9,600,000 x 365 = 0.0833 x 365 = about 30 days, so the business holds roughly one month of sales in cash. If the board decided to keep only $600,000 on hand, the ratio would rise to $9,600,000 / $600,000 = 16.0 and the buffer would fall to around 23 days.Case study
Seen in the real world.
The following is a fictional, illustrative scenario. Ashcombe Tools, an invented hand tool wholesaler, reported net sales of $14,000,000 and a year end cash balance of $3,500,000, giving a sales to cash ratio of 4.0 and prompting a shareholder to ask why so much money was doing nothing.
A closer look at the monthly balances showed a different story. Cash averaged $1,750,000 through the year and only spiked in December because a large customer had settled three invoices early, which meant the true average ratio was $14,000,000 / $1,750,000 = 8.0.
In this illustrative example, Ashcombe kept a $1,000,000 buffer for stock purchases, used $750,000 to negotiate early settlement discounts with two suppliers and returned the rest as a dividend. Reporting the ratio on an average basis from then on stopped the annual argument about a number that had never been representative.
Watch out
Common mistakes.
- Using the year end cash balance rather than an average, which produces a ratio distorted by seasonal or one off movements.
- Assuming a high ratio is always good, when it can equally mean the business is dangerously short of a cash buffer.
- Comparing the ratio across industries with completely different collection patterns, such as a cash retailer against a project based contractor.
Questions
People also ask.
What is a good sales to cash ratio?
There is no universal answer, which is why the figure is judged against the company's own history and its closest competitors rather than a fixed benchmark.
Should short term investments be included in the cash figure?
Yes, cash equivalents such as deposits maturing within three months are normally included because they can be turned into cash quickly.
How does this differ from the cash ratio?
The cash ratio compares cash with current liabilities to test whether short term debts can be paid, while this ratio compares cash with trading volume to test efficiency.
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