How To Calculate Days Cash On Hand

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What is Days Cash On Hand?

Days cash on hand is based on the assumption that there is no current cash flow from sales but there are operating expenses, e.g., rent and utilities, to incur. It refers to the number of days a business would have been able to run with the cash on hand if revenue had not been generated.

It is important to business owners or decision-makers in the company particularly in the following situations:

  • A company is just getting started and has yet to make any money from sales.
  • A company is switching to a new product line when the previous product line’s sales are either low or decreasing.
  • A company’s seasonal sales cycle is at its lowest point and there may be no revenue.

Entities should try to maintain longer days cash on hand. It allows them to continue operating when times are tough. Those with low days cash on hand may be forced to take out loans to pay operating costs when things do not get better sooner.

How Do You Calculate Days Cash On Hand?

To calculate days cash on hand, we will start with the operating expenses in the income statement.

Since we only want the portion that we will actually pay in cash, we will deduct all non-cash charges from the operating expenses, which are normally depreciation and amortization.

Now, these adjusted operating expenses are the minimum cash on hand that we need to have to keep the business afloat for one more accounting period.

Then, divide the adjusted operating expenses by 365 (represents one accounting period) to calculate the amount of cash outflow per day.

Lastly, take the total amount of cash on hand and divide it by the cash outflow per day that we determined above and we will now arrive at the days cash on hand.

Days Cash On Hand Formula

The full formula is:

Cash on hand ÷ [(Operating expenses – Non-cash charges) ÷ 365 days]

Example

To paint a clearer picture, here is an example:

Company A has just started its operations and the owner has pumped in cash of $350,000. This $350,000 is Company A’s cash on hand.

It has yet to generate any sales and its annual operating expenses are expected to be $900,000. The annual operating expenses include $56,000 of depreciation.

Using the formula that we showed earlier, here is how you can determine the days cash on hand for Company A:

Cash on hand ÷ [(Operating expenses – Non-cash charges) ÷ 365 days]

= $350,000 ÷ [($900,000 Operating expenses – $56,000 Depreciation) ÷ 365 days]

= 151 days cash on hand

That means Company A will be able to survive for close to half a year had it still not been able to generate any revenue by then.

Why is Days Cash On Hand Important?

Days cash on hand is very useful because it helps businesses to plan ahead better in terms of the sales they need to make or the funds they need to raise. A minimum of 30 days cash on hand is required for a well-managed business, but 90 days is recommended to allow for an unanticipated turn of events.