What is “Days of Cash?”

Days of cash is a measure of how much cash a company has in relation to its monthly operating expenses.  It helps answer the question, “How much cash do I need?”  It also allows you to track your company’s performance over time, or to compare companies of different sizes.

As with Cash itself – more is better when it comes to Days of Cash.  In my view, you can never have too much.

What are good and bad values for Days of Cash?

One interpretation of Days of Cash is that it is the number of days you can stay in business if you don’t make any more sales or collect any more money from customers.  Here are some ranges of values from bad to good:

Less than zero – this is bad.  It means you are holding back checks you have written to send after the cash arrives.  Your payables are understated on your balance sheet as a result.  This is a highly stressful time.

0 to 15 days – you are still in financial distress and having to spend too much time worrying about it and managing what gets paid when

15 to 45 days – you have some breathing room, but still need to keep an eagle eye on cash flow

45 days or more – this is good.  You have more important things to worry about.  However, things can change quickly, so you still need to track Days of Cash on a regular basis to make sure it stays in the good zone.

How to calculate Days of Cash

The simple definition is to take your ending cash balance and divide by daily cash operating expenses (Total Operating Expenses less Depreciation and Amortization). 

Cash is really cash and cash equivalents – stuff you can use to pay your bills.  So it includes your bank account and short term investments that can be converted to cash quickly.

Daily cash operating expenses are calculated differently depending on the time frame you are looking at.

There are four commonly used time periods when doing financial analysis:

1. Months

2. Quarters

3. Year to Date (1..12 months)

4. Years

The trick is to calculated Annualized Cash Operating Expenses for each of these time periods, and then divide by 365 to get a daily number.

For a single month:  Daily Cash Operating Expenses = (Monthly Cash Operating Expenses * 12 ) / 365

For a quarter:  Daily Cash Operating Expenses = (Quarterly Cash Operating Expenses * 4 ) / 365

For a year-to-date period: Daily Cash Operating Expenses = ((Year to Date Cash Operating Expenses / Number of Months) * 12 ) / 365

For a year: Daily Cash Operating Expenses =  Cash Operating Expenses  for the year / 365

Then:

Days of Cash = Ending Cash Balance / Daily Cash Operating Expenses

Example Days of Cash Calculation

from Company A’s financial statements: 

Annual Revenues:  $150,000

Total Operating Expenses for October: $10,000

Depreciation for October: $1,000

Cash as of October 31:  $3,000

Calculations:

Monthly Cash Operating Expenses for October = $10,000 – $1,000 = $9,000

Daily Cash Operating Expenses for October = $9,000 * 12 / 365 = $108,000 / 365 = $295.89

Days of Cash at the end of October = $3,000 / $295.89 = 10.1 Days

 

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