What Is Days Cash on Hand?
Days cash on hand (DCOH) is a crucial financial metric that quantifies the number of days a business can continue to fund its operating expenses using its available cash reserves, assuming no new cash flow from sales.64, 65 This ratio belongs to the broader category of financial ratios, specifically serving as a key indicator of a company's liquidity and overall financial health. DCOH helps businesses assess their ability to meet short-term financial obligations like payroll, rent, and vendor payments, particularly during periods of low revenue or unexpected disruptions.62, 63 It provides an understanding of how long a business can remain operational if its income streams were to cease temporarily.60, 61
History and Origin
The concept of managing liquid assets to ensure a company's ability to cover its short-term obligations has long been central to sound financial management. While the specific metric "days cash on hand" may be a more modern construct, the underlying principles of corporate liquidity management date back at least to John Maynard Keynes's work in the 1930s.59 The importance of maintaining sufficient cash reserves gained renewed attention during the 2008–2009 global financial crisis, as credit markets tightened and internal cash became vital for corporate survival. A57, 58cademic research highlights that the evolution of corporate cash holdings has shown significant fluctuations over the past century, with periods of increasing and decreasing cash balances similar in magnitude to recent decades, although driven by different factors.
56## Key Takeaways
- Days cash on hand (DCOH) measures how long a company can cover its operating expenses with existing cash, assuming no new revenue.
*54, 55 It serves as a vital indicator of a company's short-term liquidity and ability to withstand financial shocks.
*52, 53 DCOH is particularly important for startups, seasonal businesses, and organizations facing uncertain revenue streams.
*50, 51 A higher DCOH generally indicates greater financial stability, providing a larger cushion for unexpected events.
*48, 49 The calculation involves a company's total cash and cash equivalents and its average daily cash operating expenses.
46, 47## Formula and Calculation
The formula for calculating days cash on hand involves two primary components: the amount of cash and cash equivalents a business possesses, and its average daily cash operating expenses. Non-cash expenses, such as depreciation and amortization, must be excluded from total operating expenses to arrive at the true cash outflow.
44, 45The formula is expressed as:
Where:
- Cash on Hand: Refers to the total liquid assets available, including physical cash, bank deposits, and highly liquid short-term investments easily convertible to cash. T42, 43his information is typically found on the balance sheet.
*41 Average Daily Cash Operating Expenses: Calculated by taking the annual operating expenses (from the income statement), subtracting any non-cash expenses (like depreciation and amortization), and then dividing the result by 365 days.
39, 40For example, to calculate the average daily cash operating expenses:
Interpreting Days Cash on Hand
Interpreting the days cash on hand ratio requires considering the specific industry, business model, and economic environment. A higher DCOH figure indicates that a company has a substantial cash reserve relative to its daily cash outflows, suggesting robust liquidity and financial resilience. This provides a greater buffer to manage unexpected expenses or periods of reduced income. C37, 38onversely, a low DCOH may signal potential cash flow problems and an increased risk of failing to meet short-term obligations.
36While a higher number often implies conservative financial management, an excessively high DCOH could also suggest inefficient use of cash that might otherwise be invested for growth or higher returns. M34, 35any organizations aim for a DCOH between 60 to 180 days, though this target can vary significantly based on factors like business size, revenue cycles, and risk tolerance. C32, 33omparing a company's DCOH to industry benchmarks and its own historical performance provides valuable context for effective financial planning.
30, 31## Hypothetical Example
Consider "GreenTech Innovations," a startup focused on renewable energy solutions.
- GreenTech Innovations has $250,000 in cash and cash equivalents.
- Their annual operating expenses total $730,000.
- Included in these operating expenses are $30,000 for depreciation (a non-cash expense).
First, calculate the annual cash operating expense:
Annual Cash Operating Expense = $730,000 (Total Operating Expenses) - $30,000 (Depreciation) = $700,000
Next, calculate the average daily cash operating expense:
Average Daily Cash Operating Expense = $700,000 / 365 days = $1,917.81 (approximately)
Finally, calculate the days cash on hand:
Days Cash on Hand = $250,000 (Cash on Hand) / $1,917.81 (Average Daily Cash Operating Expense) = 130.36 days (approximately)
In this hypothetical scenario, GreenTech Innovations has approximately 130 days cash on hand, indicating it could sustain its operations for over four months without any additional revenue. This provides the company with a significant financial cushion to navigate early-stage challenges or market fluctuations.
Practical Applications
Days cash on hand is a critical metric for assessing and managing a company's liquidity and overall financial health. Its practical applications span several areas of financial management and analysis:
- Emergency Preparedness: DCOH acts as an immediate indicator of how long a business can survive a sudden halt in revenue, such as during an economic downturn or unforeseen crisis. It guides the setting of internal cash reserve targets.
*28, 29 Budgeting and Financial Planning: By understanding their DCOH, businesses can make more informed decisions about spending, savings, and investment opportunities. It helps in developing realistic budgets and forecasts, ensuring adequate funds are allocated to cover essential costs.
*26, 27 Investor and Creditor Confidence: A healthy days cash on hand ratio can demonstrate a company's financial stability and responsibility to potential investors and lenders, making it easier to secure financing. F24, 25inancial ratios, including DCOH, provide valuable insights into a company's performance and are used by stakeholders for competitor analysis and benchmarking.
*22, 23 Strategic Decision-Making: For management, DCOH provides insight into the company's financial resilience, influencing decisions on growth initiatives, capital expenditures, or the need for working capital adjustments.
Limitations and Criticisms
Despite its utility, days cash on hand has several limitations that users should consider for a comprehensive financial analysis:
- Reliance on Historical Data: DCOH is calculated using past operating expenses and current cash balances, meaning it does not account for future cash inflows from sales or changes in expense patterns. This can lead to an incomplete picture of future liquidity positions.
*20, 21 Assumption of Even Cash Outflow: The metric assumes a consistent daily cash outflow, which rarely reflects real-world business operations where expenses like payroll or rent are often paid in large, infrequent sums. T18, 19his simplification may overestimate the actual duration cash reserves will last. - Ignores Future Inflows and Debt Obligations: Days cash on hand does not factor in anticipated revenue from sales, accounts receivable collections, or upcoming loan payments and other financial commitments. A company might have a seemingly high DCOH but still face solvency issues if significant debt repayments are imminent.
*17 Industry Variability: What constitutes an "ideal" or "healthy" DCOH can vary significantly across industries due to differing working capital requirements and business cycles. A15, 16 direct comparison across unrelated industries may be misleading.
Days Cash on Hand vs. Cash Conversion Cycle
While both days cash on hand (DCOH) and the cash conversion cycle (CCC) are crucial for evaluating a company's liquidity and efficiency, they measure different aspects of cash management. Days cash on hand focuses on a company's ability to cover its operating expenses solely with existing cash reserves, essentially providing a snapshot of how long the business can survive without new income. It's a measure of immediate financial cushion.
13, 14In contrast, the cash conversion cycle measures the time it takes for a company to convert its investments in inventory and accounts receivable back into cash, after accounting for the time it takes to pay accounts payable. T12he CCC assesses operational efficiency and the effectiveness of a company's cash flow management throughout its entire operating cycle—from purchasing inventory to collecting cash from sales. A s11horter CCC generally indicates more efficient operations and better cash management, whereas DCOH is about the absolute safety net.
What is a good days cash on hand ratio?
There isn't a universally "good" days cash on hand ratio, as the ideal number varies by industry, business size, and specific circumstances. However, many financial professionals suggest a range of 60 to 180 days provides a healthy buffer, allowing a company to cover its operating expenses for two to six months without additional revenue. Startups or businesses with volatile revenue streams may aim for a higher figure.