Days Cash on Hand
Days Cash on Hand (DCOH) is a financial metric that measures the number of days a company or organization can continue to pay its operating expenses, given the amount of cash available.
It’s particularly relevant for non-profit organizations, hospitals, and companies in other industries that require significant liquidity. However, it can be a useful measure for any organization to understand its liquidity position.
The formula to calculate Days Cash on Hand is as follows:
\(\text{Days Cash on Hand} = \frac{\text{Cash and Cash Equivalents}}{\text{Operating Expenses}} \times 365 \)
Where:
- “Cash and Cash Equivalents” refers to the company’s most liquid assets, which can include cash, checking accounts, short-term government bonds, treasury bills, marketable securities, and short-term bank certificates of deposit.
- Operating Expenses” are the costs associated with running the day-to-day operations of a business, excluding costs of goods sold (COGS), and can include things like rent, utilities, salaries, and maintenance.
The result, in number of days, indicates how long the organization could continue to pay its operating expenses without any additional cash inflow.
A higher DCOH value means the company has greater liquidity, and can sustain its operations for a longer period of time without any additional cash inflow. However, having too much cash on hand can also be seen as inefficient if those resources could be better used elsewhere in the business. Conversely, a low DCOH might indicate potential liquidity issues, but could also suggest efficient cash management, depending on the nature of the business and industry norms.
It’s important to compare DCOH values to other companies within the same industry, as what’s considered a “good” or “bad” DCOH can vary widely between industries.
Example of Days Cash on Hand
let’s consider a hypothetical example of a small retail business.
Let’s say this business has $73,000 in cash and cash equivalents. In terms of operating expenses, it spends about $500,000 annually to cover costs like rent, utilities, salaries, and other day-to-day operating costs.
Using the formula for Days Cash on Hand:
\(\text{Days Cash on Hand} = \frac{\text{Cash and Cash Equivalents}}{\text{Operating Expenses}} \times 365 \)
We can plug in the numbers:
\(\text{Days Cash on Hand} = \frac{\$73,000}{\$500,000} \times 365 = \text{approximately 53.4 days} \)
This means, given its current level of cash and cash equivalents, the business can continue to pay its operating expenses for roughly 53 days without any additional cash inflow.
This is a simplified example, and real-world calculations may be more complex, as they might need to account for seasonal variations in operating expenses, variations in cash flow, and other factors. Also, interpretation of the DCOH would involve comparisons with industry averages or with the same company’s historical DCOH values to understand trends and context. But this example should give you a basic idea of how the Days Cash on Hand metric works.
