How To Calculate Cash Flow Coverage Ratio in Freshbooks | Arithmix

Learn how to calculate cash flow coverage ratio in Freshbooks with our step-by-step guide. Improve your financial management skills and make informed decisions for your business.

Calculating your cash flow coverage ratio is an important step in understanding your business's financial health. This ratio helps you determine how much cash your business generates and how much of that cash is available to cover your expenses. In this article, we'll explain what cash flow coverage ratio is, when it's valuable to calculate, and how to calculate it.

What Is Cash Flow Coverage Ratio?

Cash flow coverage ratio is a financial metric that measures the ability of a business to cover its expenses with its cash flow. This ratio is calculated by dividing your business's cash flow by its total debt service. Cash flow refers to the amount of cash your business generates from its operations, while total debt service includes all of your business's debt payments, including principal and interest.

For example, if your business generates \$100,000 in cash flow and has \$50,000 in total debt service, your cash flow coverage ratio would be 2. This means that your business generates enough cash flow to cover its debt service twice over.

When Is It Valuable To Calculate Cash Flow Coverage Ratio?

Calculating your cash flow coverage ratio is valuable in several situations. For example, if you're applying for a loan, lenders will often look at your cash flow coverage ratio to determine whether you're a good candidate for the loan. A high cash flow coverage ratio indicates that your business is generating enough cash flow to cover its expenses and debt payments, which makes you a more attractive borrower.

Additionally, calculating your cash flow coverage ratio can help you identify areas where you may need to improve your business's financial health. If your cash flow coverage ratio is low, it may be a sign that your business is struggling to generate enough cash flow to cover its expenses and debt payments. In this case, you may need to take steps to increase your cash flow, such as cutting expenses or increasing revenue.

How to Calculate Cash Flow Coverage Ratio

Here's how to calculate your cash flow coverage ratio:

3. Divide your business's cash flow by its total debt service. The resulting number is your cash flow coverage ratio.

It's important to note that a cash flow coverage ratio of less than 1 indicates that your business is not generating enough cash flow to cover its debt payments. In this case, you may need to take steps to improve your business's financial health.

Overall, calculating your cash flow coverage ratio is an important step in understanding your business's financial health. By knowing your cash flow coverage ratio, you can make informed decisions about your business's finances and take steps to improve its financial health if necessary.

How Do You Calculate Cash Flow Coverage Ratio in Freshbooks

Freshbooks itself isn’t naturally geared towards letting you calculate complex metrics like Cash Flow Coverage Ratio. As an alternative, teams typically use products like Arithmix to import data from Freshbooks and build out dashboards.

What is Arithmix?

Arithmix is the next generation spreadsheet - a collaborative, web-based platform for working with numbers that’s powerful yet easy to use. With Arithmix you can import data from systems like Freshbooks, combine it with data from other systems, and create calculations like Cash Flow Coverage Ratio.

In Arithmix, data is organized into Tables and referenced by name, not by cell location like a spreadsheet, simplifying calculation creation. Data and calculations can be shared with others and re-used like building blocks, vastly streamlining analysis, model building, and reporting in a highly scalable and easy to maintain platform. Data can be edited, categorized (by dimensions) and freely pivoted. Calculations are automatically copied across a dimension - eliminating copy and paste of formulas.