Six Sigma and KPIs: Your Working Capital Ratio

Key performance indicators (KPIs) can help you drive justifiable, data-centric decisions regarding your business operations. Using your KPIs properly will ensure the success of your operations for the future. KPIs such as your working capital ratio are integral to understanding and managing your business’s cash flow. Think about how well you manage your cash flow. Could it be better? Managing your cash flow is the secret to maintaining successful operations. Today we talk about Six Sigma and your working capital ratio. Keep reading to learn how Six Sigma can improve your organization’s cash flow.

What is Your Working Capital Ratio?

In case you don’t know, your working capital ratio is a liquidity ratio. It measures whether your business can pay off its current liabilities using current assets. As such, your working capital ratio allows you to gain a deeper understanding of your company’s liquidity. It’s essential for business owners to understand the necessity of the working capital ratio. You can calculate your working capital ratio as follows:

Working Capital Ratio = Current Assets/Current Liabilities

But what are current assets and liabilities? Well, they are usually debts and other payments that you should make. It’s best to pay them using current assets such as cash, cash equivalents, or marketable securities. You can quickly convert current assets into cash. They are also more flexible than fixed ones. This means you are far more likely to have cash on hand to pay debts when you need to. We call it the working capital ratio as it relies on working capital calculation. As your current assets exceed your liabilities, your company will have enough cash to maintain everyday operations.

Improve Your Cash Flow with Six Sigma

Using Six Sigma and related methodologies like Kaizen, you can cultivate a culture of continuous improvement. It is this precise discipline that allows you to transform your business. You can apply Six Sigma ideas at just about any level of your organization. Six Sigma can also help where cash flow is concerned. Using Six Sigma ideas, you can drastically increase your cash flow so you can easily manage liabilities like debts and other costs. It’s important to note one of the most powerful driving factors behind strong cash flow.

Accounts Receivable and Revenue Growth

For accounts receivable, you should not consider the order completed until you have received payment. Your ultimate goal should be to receive payment as quickly as possible following a sale. But the perfect order can be a tricky thing to achieve. You must ensure the customer receives the right product at the right time, in the right quantity and condition. By consistently delivering perfect orders and reducing order-to-delivery lead times, you can receive payment quicker. Six Sigma will help you streamline this process so you can maximize customer satisfaction and your company’s success.

Similarly, using Six Sigma techniques, you can identify positive and negative customers. Base your assessment on how profitable their individual accounts are. This allows you to retain your good customers while developing new and profitable ones that increase cash flow. Then, reducing your inventories to become most cost-competitive helps pave the way for a Six Sigma level of quality.