The One Ratio Every Board Should Watch Monthly
Boards are drowning in data. Monthly packs grow thicker. Dashboards multiply. KPIs expand.
And yet, many boards are still surprised when performance deteriorates.
The problem is not information. It is focus. In periods of pressure, boards don’t need more numbers. They need one ratio that tells the truth early.
The Ratio: Cash From Operations ÷ EBITDA
This ratio answers a brutally simple question:
- How much of our reported operating performance is turning into real cash?
In healthy, well-run businesses, operating profit converts into cash consistently over time.
In struggling businesses, it doesn’t.
The gap between EBITDA and operating cash flow is where most turnarounds begin.
Why This Ratio Matters More Than Almost Anything Else
- It Exposes Earnings Quality
EBITDA is an opinion. Cash is a fact. When this ratio weakens, it signals:
- working capital stress
- aggressive revenue recognition
- pricing or collection issues
- operational inefficiency.
Often long before the income statement looks alarming.
2. It Cuts Through Narrative
Management explanations can rationalise almost anything except missing cash. This ratio strips away optimism and focuses discussion on execution reality.
3. It Highlights Early Risk
A declining cash conversion ratio narrows optionality quietly.
By the time lenders raise concerns, the ratio has actually been deteriorating for months.
What the Ratio Should Look Like
There is no universal “perfect” number, but some rules of thumb help:
> 1.0 (over time): Strong cash discipline
≈ 1.0: Generally healthy
< 0.8 consistently: Warning signal
< 0.6: Intervention territory.
Short-term volatility is normal. Persistent underperformance is not. Trend matters more than a single month.
Why Boards Often Miss This
- EBITDA Feels Comparable
EBITDA is easy to benchmark across peers. Cash is messier, but far more honest.
- Working Capital Is Underplayed
Boards often treat cash flow swings as timing issues. Timing becomes structural surprisingly quickly.
- Too Many KPIs Dilute Attention
When everything is monitored, nothing is prioritised.
This ratio forces the right conversation.
How Strong Boards Use This Ratio
Effective boards:
- review it every month, not quarterly
- demand explanations for sustained divergence
- link it to incentive discussions
- use it to guide capital allocation decisions
- treat deterioration as an early-warning system.
They don’t panic on one bad month. They act on patterns.
The Boardroom Question That Changes Behaviour
Whenever this ratio weakens, boards should ask:
- “If this continues for the next six months, what decisions would we wish we had made today?”
That question shifts the conversation from reporting to responsibility.
The Bottom Line
Boards don’t need perfect foresight. They need honesty early. If you only track one ratio consistently, make it one that forces reality into the room.
Because by the time profit declines, cash has already told the story.
Why Maxit Advisory?
For a consulting firm, a turnaround situation demands immediate attention to problems arising from the client’s customers, creditors, employees or competitors. From experience, Maxit Advisory recognizes the level of demands and understands the effort required to help a company through the crisis. Our depth of management enables us to address many problem areas simultaneously.
We specialise in directing management through all the stages involved in a workout environment. This presentation has been designed by Maxit Advisory for the express purpose of assisting our clients in quickly developing a basic understanding of the turnaround process and their role in it.
Don’t postpone acting. Get specialist professional help fast! Start off by contacting Maxit Advisory to assist in assessing the problem and identify the available options. And keep in mind: Business Rescue is an option, but all other options should be considered before entering this process. The early engagement of a Turnaround Specialist experienced in crafting solutions not only provide more options to control the process and protect shareholder value but also could lead to increased likelihood of a successful outcome!
Choosing the right Turnaround Advisor is key.
- Firstly, note that nothing surpasses experience and a good track record (‘the best predictor of future performance is past performance’) in your choice
- Secondly, engage an advisor that can not only take your company through a formal Business Rescue process, but someone that has successfully turned around many companies without the cover of legal protection
- Lastly, engage someone who has been in the ‘hot seat’ before – i.e., someone who has managed a significant business before (and carried responsibility for the Income Statement, Balance Sheet and Cashflow of the entity). Someone you can trust.
And then you can ‘short circuit’ the search process by contacting Maxit Advisory, a specialist Turnaround firm. Even faster, call Maxit’s Managing Partner, Paul Aucamp, and set up a meeting.
- Mobile number = +27 (0)82 570 4678
- Email address = paul@maxit.co.za
- Website = www.maxit.co.za