Days cash on hand is the number of days a business could keep paying its operating costs out of the cash it already holds, if no further money came in at all. It is cash and near-cash divided by one day’s worth of cash operating expenses, and the assumption of zero receipts is deliberate: the measure is a floor, not a forecast.
days cash on hand = cash + cash equivalents + short-term investments
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(annual operating expenses - noncash expenses) / 365The Numerator: What Counts as Cash
Cash on hand and in the bank is obvious. Cash equivalents are the ones worth checking, because the label is narrower than most charts of accounts treat it. The standard reaches only short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates (FASB, Statement of Financial Accounting Standards No. 95, paragraph 8), and how that maturity test is applied, including the fact that it is measured to the holder, is worked through in cash equivalents.
Short-term investments outside that definition can still belong in the numerator, since the question here is what could be turned into money quickly rather than what qualifies for a balance sheet caption. Say so when they are included.
Two balances do not belong. Restricted cash cannot be spent on operating costs, so counting it answers a question nobody asked. An undrawn line of credit is borrowing capacity rather than cash held, and a measure that includes it is answering a different question, which should be labelled as such rather than folded into this one.
The Denominator: The Step Most Calculations Skip
The denominator is one day of cash operating expense, and reported operating expenses are not that. They include charges that consume no cash in the period: depreciation, amortization, bad debt expense, stock-based compensation, and any impairment.
Leaving those in inflates the daily spend and shortens the answer, which sounds conservative and is simply wrong. A business does not pay depreciation to anybody.
cash and cash equivalents 480,000
short-term investments 120,000
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numerator 600,000
annual operating expenses 3,650,000
depreciation and amortization included 210,000
bad debt expense included 40,000
cash operating expenses 3,650,000 - 250,000 = 3,400,000
per day 3,400,000 / 365 = 9,315
days cash on hand 600,000 / 9,315 = 64.4Run the same numerator against unadjusted expenses and the answer is 60.0 days. The difference of more than four days came from nothing that happened in the business.
What the Answer Does Not Mean
It is not a runway. Runway assumes the business keeps collecting from customers while it spends, so it nets receipts against payments. Days cash on hand assumes nothing comes in. The two answer different questions and the second is always the smaller number, which is why the burn rate figures a business plans with are not interchangeable with this one.
It is not a solvency test either. A business with a high count and a large balloon payment falling due next month is in trouble the measure cannot see, because the denominator is built from operating expenses and carries no debt service, no capital spending and no tax payments. Adding those in is a defensible variant, and it produces a different number that has to be labelled differently.
And it is a snapshot. A firm measured the week after filing-season fees land looks very different from the same firm measured in November, so the count belongs next to the date it was taken and, on a seasonal book, next to the same date last year.
Is There a Right Number
No general one. What a business needs depends on how variable its receipts are, how much of its cost base it could stop paying quickly, and what it has committed to.
Where a fixed level exists, it is usually a covenant rather than a rule of accounting: lenders and bond documents set a minimum days-cash figure for a specific borrower and define exactly which balances and expenses go into it. Two borrowers can both be complying with a days-cash covenant while computing it differently, so the definition in the document governs, and it is worth reading before reproducing a figure from a prior year’s workpaper.
Common Questions
Add cash, cash equivalents and any short-term investments you are willing to count. Take annual operating expenses, subtract every noncash charge inside them, and divide by the days in the year to get a daily figure. Divide the first by the second. State which balances you counted and which charges you removed, because both are choices.
One is measured in days and one is a ratio of balances. Days cash on hand compares cash to what the business spends, so it answers how long. The current ratio compares current assets to current liabilities, so it answers whether near-term obligations are covered, and the family it belongs to is set out in liquidity ratios. A business can look comfortable on one and thin on the other, because receivables and inventory count in the ratio and not in the cash.
Yes, and on a seasonal business it should be. Use the trailing twelve months of cash operating expenses for the denominator rather than annualizing one month, since a single month’s spend rarely represents the year, and read the series rather than any one reading.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can put a real block of its own recurring work through a trial task before anything client facing depends on it.
