Days Cash on Hand: Everything You Need to Know

A small business credit survey in 2024 found that 51% of small firms have uneven cash flow, and 56% are not able to cover their operating expenses. Clearly, cash flow challenges exist at all stages of maturity. Larger firms making millions of dollars can face unforeseen circumstances that impact cash flow from time to time, such as market downturns, unexpected expenses, slow periods, etc. 

The biggest advantage that allows a business to survive when the going gets tough is liquidity, which is having cash on hand to cover regular business activities. Taking stock of one specific measure, such as Days Cash on Hand (DCOH), is critical.

Whether you are a startup founder, a finance manager, or a seasoned business operator, understanding your DCOH will assist you in preparation, patience, and decision-making. 

Need a clearer picture? This article has you covered, as we explain the basics of DCOH, how to calculate it, and how it helps you assess your financial health.

What exactly is Days Cash on Hand? 

DCOH is about how many days a company can maintain day-to-day operations based solely on cash remaining in the account. It is a measure of liquidity and the overall financial health of a business. It points out the potential cash flow issues in their early stages. 

DCOH assumes that there won't be any revenue coming from sales. So, how many days do you think the business could keep going if the income just stopped? A lower number of days cash on hand might suggest that there could be some challenges coming up soon, like payroll, rent, vendor bills, and so on. 

DCOH helps small businesses that are building their sales and cash inflows or those that might be going through a seasonal dip in revenue. In these cases, cash inflows might be limited, a bit unpredictable, or just not work as they should. It helps you understand how long a business can keep running.

How to determine Days Cash on Hand?

Although determining DCOH sounds difficult, it can actually be relatively simple if you break down the calculation step by step. Here is the equation: 

Let’s examine each of the components in turn: 

• Cash on hand: This is the total liquidity the company possesses at any moment in time. This includes cash and cash equivalents that you will see generally on the balance sheet.

• Annual operating expense: This refers to all of the company’s expenses associated with operating the business for the year, such as rent, salaries, utilities, and daily operating expenses. 

• Non-cash expenses: These refer to accounting entries such as depreciation or amortization. Non-cash expenses do not draw cash out of the company, so we eliminate them from the operating expenses in the formula to accurately determine the true daily cash outflows. 

When you subtract non-cash costs from the total annual amount and divide it by 365, you arrive at the average cash the business spends daily. Once you divide the daily amount from the available cash, you determine how many days the business can cover bills without any incoming cash.

Now let's review the example.

Let’s say you are a mid-sized manufacturing company and you have the following:

• Cash on Hand: $550,000
• Annual Operating Expenses: $2,000,000
• Depreciation and Amortization: $120,000

The first step is to subtract the non-cash expenses from the operating expenses:

$2,000,000 - $120,000 = $1,880,000

Then, divide by 365:

            $1,880,000 ÷ 365 = $5,150.68

Now, divide cash on hand by daily operating expenses:

$550,000 ÷ $5,150.68 = 106.79

This indicates that the company has roughly 107 days before its cash runs out completely without earning any revenue.

Why does Days Cash on Hand matter?

DCOH is a good metric for finance teams that want to keep track of liquidity and improve budgeting practices. When you compare yourself to competitors or others in your industry, you gain perspective on your resilience. You will know whether you manage cash better or worse than other companies. 

In a risk context, it indicates a lower probability of ending up in crisis. A good DCOH means you have a good cash buffer that helps you absorb hits such as payment delays, rising costs, or temporary shutdowns without having to scramble for loans or wholesale cost reductions.

What exactly does your DCOH ratio say to you? 

Having high Days Cash on Hand (DCOH) is typically not bad; it indicates that the business has an adequate cash buffer and is in good standing in terms of liquidity. However, high DCOH can sometimes be undesirable in the sense that it indicates the company may be holding more cash than it needs, rather than advancing it toward growth or using its capital efficiently. 

At the same time, there are also reasons to run low on DCOH that warrant potential flags. There can be future liquidity concerns in the event of a scenario where expense requirements leave your company with little to no cash. In that case, your focus should always remain on having enough cash to pay employees, given the uncertain outcome of an unknown circumstance.

Different industries dictate different cash needs. For example, trades, construction, and manufacturing are more capital-intensive and have longer billing cycles, and therefore hold more cash on hand. At the same time, quick retail doesn't need much cash on hand to manage its business. So, you may get a better idea of how well your company manages its finances by tracking trends.

Strategies to improve our Day’s Cash on Hand

If your Days Cash on Hand (DCOH) is not where you’d like it to be, there are effective ways to improve it.

• Automated cash forecasting tools that use machine learning examine a company’s historical data to generate precise, customized future cash flow projections. 

• Scenario analysis tests possible financial outcomes and makes sophisticated evaluations of how it will affect your cash position. Scenario analysis can help you have a reliable lens through which you can view liquidity positions before making decisions.

• Cash management technology offers a consolidated real-time dashboard that shows your entire global cash position, improving the speed at which you act on large cash flow items like payroll, tax, and more. 

Fuel your growth with better cash control

Getting your Days Cash on Hand straight is an important part of building a financially sound business. If you are wondering about the process, some fintechs are offering tools and software that can help you with it. 

Bookkeeping and accounting software, along with financial modeling tools like Excel or Google Sheets, can help you simplify these processes, keep track of spending, and properly plan your business decisions.

They can manage cash flow, affirm budget forecasting, and allow your teams to make effective decisions — all of which greatly benefit your startup. If you're just starting out, don't forget that there are the right tools to stay up and running.