Cash throughput volume calculates how much money is left over after subtracting direct costs from net sales reflecting the cash flowing into a business to cover overhead costs at a profit..

Primary Implication

The higher your Cash Throughput Volume, the more likely you are to build cash reserves in the bank if SG&A expenses are less than the Gross Profit earned.

A business with low cash received after Direct Costs are subtracted from Net Sales and is probably using today’s sales to pay yesterday’s operating expenses.  This is the number one cause for borrowing from Peter to pay Paul.

Correct this by either increasing your prices or reducing your Cost of Goods Sold to increase your Cash Throughput Volume.

Overview

Knowing how much incoming cash you can expect from sales is important.  Knowing how much cash you’ll have left over after paying the direct costs for those sales vs. money that is simply passing through your bank account because there isn’t enough margin in it is more important.

Cash Throughput Volume is a Throughput Ratio that reflects how much money is left over after direct costs are subtracted from net sales.  On a cash basis, this is the equivalent of “Gross Profit” on your P&L Statement.  Simply put, having cash in the bank doesn’t mean that it’s yours to spend.  Without a strong Gross Profit influenced Cash Inflow, it’s impossible to build cash reserves in the bank.

In short, Cash Throughput Volume reflects the proportion of every sale deposited in the bank that should be available to cover variable and fixed expenses and create cash reserves.

The formula for calculating Cash Throughput Volume is as follows:

Net Sales – COGS = Cash Throughput Volume

For example, Net Sales of $250,000 and COGS of $225,000 means that only $25,000 from those sales is available to pay overhead expenses and leave an operating profit.  If the SG&A expenses are less than $25K, then they are likely to build cash reserves; if SG&A is more than $35K, they will burn through $10K of cash reserves, covering operating costs tied to the $250K in sales.

Higher Creates Opportunity: means you are likely to build cash reserves in the bank if SG&A expenses are less than the gross profit earned.

Lower Creates Challenges: indicates that the company is probably using today’s sales to pay yesterday’s operating expenses.