Calculate Days Cash on Hand

How to Calculate Days Cash on Hand

Understanding the Formula

To accurately calculate the days cash on hand, use the formula: Days Cash on Hand = Cash on Hand / [(Annual Operating Expense – Non-Cash Items) / 365 Days]. This calculation divides the company's cash on hand by its daily cash operating expense, determined after adjusting the annual operating expenses by removing any non-cash items and then dividing by 365.

Required Data

Three key pieces of information are necessary for this calculation:

Applicability

This metric is particularly crucial for early-stage startups, companies that are not cash flow positive, and those in risky operational states. It is essential for entities with high operating expenses and low cash flow, helping them determine how long they can sustain operations with the cash resources they have.

How to Calculate Days Cash on Hand

Understanding Days Cash on Hand

Days Cash on Hand (DCH) is a critical financial metric for assessing a company's liquidity, indicating how many days it can operate with its available cash. This measure is particularly vital for startups and companies facing low cash flows, as it determines financial stability in the absence of incoming funds.

Steps to Calculate Days Cash on Hand

To accurately calculate Days Cash on Hand, follow these specific steps:

First, identify your total Cash on Hand, which includes all cash and cash equivalents. Next, determine your Annual Operating Expense and adjust this number by subtracting any Non-Cash Items such as depreciation and amortization. This gives the Annual Cash Operating Expense.

Now, convert the annual figure to a daily one by dividing the Annual Cash Operating Expense by 365 days, yielding the Daily Cash Operating Expense. Finally, divide your Cash on Hand by the Daily Cash Operating Expense:

Days Cash on Hand = Cash on Hand / [(Annual Operating Expense – Non-Cash Items) / 365 Days]

Applying the Formula

For example, if a startup has $100,000 in cash and annual operating expenses of $450,000, with $20,000 in non-cash expenses, the calculation would be as follows:

Calculate the daily operating expense:
Daily Cash Operating Expense = ($450,000 - $20,000) / 365 ≈ $1,178

Then, determine the Days Cash on Hand:
Days Cash on Hand = $100,000 / $1,178 ≈ 85 days

This calculation suggests that the startup can sustain its operations for approximately 85 days using its current cash reserves without relying on additional cash inflows.

Examples of Calculating Days Cash on Hand

Example 1: Basic Calculation

Assume a company has $500,000 in cash reserves and its daily operating expenses are $5,000. Calculate days cash on hand by dividing total cash by daily expenses: $500,000 / $5,000 = 100 days. This demonstrates the company can operate for 100 days without additional income.

Example 2: Including Short-term Investments

Consider a business with $750,000 in cash and $250,000 in short-term investments. If daily costs are $10,000, integrate investments into the calculation: ($750,000 + $250,000) / $10,000 = 100 days. This adjustment shows more accurately how long operations can be maintained.

Example 3: Fluctuating Expenses

For a firm with inconsistent daily expenses averaging $15,000 and $200,000 in cash on hand, calculate the days cash on hand as follows: $200,000 / $15,000 ≈ 13.33 days. This highlights the impact of variable expenses on liquidity.

Example 4: Seasonal Business Variations

A seasonal business with $300,000 in cash and summer daily expenses of $3,000 would calculate days cash on hand for the season by $300,000 / $3,000 = 100 days. Understanding seasonal cash flow is crucial for effective financial planning.

Example 5: Impact of Increased Expenses

If a company's daily expenses increase to $20,000 from $15,000, with no change in cash reserves ($200,000), the days cash on hand recalculates to: $200,000 / $20,000 = 10 days. This example shows how increased costs reduce financial flexibility.

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