Cash Flow Management Metrics: Days Cash on Hand

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Having strong cash reserves help your business prepare for the unexpected.  Days cash on hand is an accounting metric that evaluates the number of days a business can go on paying its operating expenses with the amount of currently available cash.  So imagine if your companies sales suddenly dropped by losing a major account or an unexpected catastrophe caused a business interruption. A company that holds substantial levels of cash on hand will be able to keep running longer and stay in business without taking on additional debt or having to borrow additional funds. The “days cash on hand” liquidity metric, is a useful financial management tool, especially if your company operates in a moderate to high expense environment.

Imagine your business was in an area that got struck by a natural disaster such as the recent “hurricane Dorian” or the wildland fires of Southern California and your premises suffered significant damage.  In a hurricane scenario, an office building could get flooded and the damage could be hundreds of thousands of dollars or even millions. If the company that gets hit, operates with strong cash reserves, it could enable them the ability to secure a contractor for renovating the building right away, not waiting around for an insurance payout or to secure a loan for repairs.

Your company may not be in an area that is prone to disasters like a hurricane or a tornado but every business should be prepared for the very worst occurrences. Perry Wiggins a CPA of APQC’s wrote about this subject in an article on CFO that their “Open Standards Benchmarking data for days cash on hand shows that some organizations are, unfortunately, only prepared for minimal disruption at best.”  Perry listed a chart that ranked companies from top performers to bottom performers.  He mentioned that “Bottom performers, for example, only have enough cash on hand to cover two months of operating expenses.”  

cash-on-handImage credit:APQC


And having only 2 months (60 days) of cash will put added pressure on a company that trying to launch a new product or service line when the sales from the older product lines have been declining.  

That certainly doesn’t leave much breathing room for an organization in the midst of recovering from a natural disaster or trying to launch a new product line when sales from the old line are declining. Now in the benchmarking study, the top-performing organizations average 4 months (120 days) cash on hand or more, would be able to cover their operating expenses twice as long.   

You must keep in mind when thinking about any key performance indicators, benchmarking metrics need to be compared to other companies of a similar size, industry and complexity because the amount of cash will vary quite dramatically.  Perry mentions that in the healthcare industry, provider organizations usually have to wait for payment reimbursement from the insurance companies should have up to 9 months or (270 days). In other industries, a company might be able to sustain operating on 3 months cash on hand without needing additional sales revenue or funds. A CFO consultant can give insights into what is the right amount of cash reserves necessary to ensure that the business can stay open in the event of a downturn or disaster.

Having a substantial amount of cash on hand is not just about being a defensive position, it also is useful when your company finds an opportunity to invest in or purchase. If you are a business that finds it difficult to increase its cash reserves, then thinking about making M&A deals, business expansion opportunities or even hiring more specialized rock star employees might not be easy to accomplish.   That is why working capital optimization is important and having enough cash on hand is necessary to ensure that you can actually pull the trigger on these kinds of opportunities without having to raise or borrow additional funds. 

Having enough cash on hand can help ensure that you can capitalize on those opportunities immediately and without having to raise additional funds.  

3 ways to improve your companies cash reserves    

cash-invoiceOne way to improve your business’s cash reserves is by analyzing days sales outstanding (DSO). And if you are in an industry that takes a long time to collect money owed from your customers, you should work to reduce it by renegotiating the payment terms and optimizing the invoice process. 

Next and especially if you already have a decent DSO in place, increasing sales will obviously help bring in more cash into the business.  Now because the days cash on hand correlates with and is tied to your operating expenses, its good idea to analyze more closely what you are spending in each area of the business.    

Make sure that your expense growth trails behind revenue growth and try to streamline your spending to help make cash on hand go farther. 

As important as it is to build up strong cash reserves, it should not overtake the role management has in running the organization.  Financial management need to be prepared for whatever things might come up, but its also crucial to invest capital into areas of the business that may give back a higher rate of return on growth. Because it would not be useful to take away money from higher growth areas of the business just for the sake of piling up cash reserves.  


In an ideal business environment, a company would not need to operate solely on its cash reserves, but when a downturn or disaster hits hardly comes at a time when it is predicted. So as the CPA Perry Wiggins said “more cash on hand means less disruption and more breathing room for the business to keep daily operations running until revenue returns.”  It also means the organization has the ability to take advantage of business opportunities without having to secure a loan or raise additional money from investors. 


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