Cash Position

Cash position is the amount of funds an organization has at a particular time. However, it explicitly represents a company's liquid funds relative to its assets and liabilities on its accounting books. It aims at maintaining a company's liquidity and financial strength and is closely monitored by internal shareholders.

The utility of this position has a broad scope as investors use it to understand a company's credibility and make investment decisions based on it. For example, a company with a strong cash position typically holds highly liquid assets such as deposit certificates, government bonds, etc. Therefore, it is a cushion during financial downturns or periods of financial uncertainty.

• Cash position refers to the number of liquid funds and assets a company owns at a particular time. A ratio equal to or greater than one is considered a good cash position.
• It is measured through the current and quick ratios, dividing a company's current assets by its current liabilities.
• Not necessarily cash, but other cash equivalents like deposit certificates, government debts, and liquid assets also denote it.
• The purpose of maintaining these positions is to ensure financial stability, provide liquidity and meet short-term financial obligations.

Cash position is a financial metric to gauge a company's liquid funds at a given time. There are multiple ways to measure it, often depending on the analysts and experts considering factors while calculating it. Therefore, all the cash and other equivalents are summed up to determine a company's current liquidity position regarding its assets and liabilities. Moreover, these positions include physical currency, such as banknotes and coins, and balances held in checking, savings, and money market accounts.

Hence, the analysis of this position may vary for different individuals. An internal stakeholder may view it as a metric to judge the company's ability to pay off its short-term loans. However, stock market analysts and potential investors also use it to decide whether to invest in it for future returns. Besides, it requires a simple calculation and can be assessed in any company's cash flow statements. It is only a positive sign if a company can cover its liabilities with its cash assets. For investors, a general rule states that any company should have a varying cash position in its portfolio, around 2% to 10%, including emergency funds, savings, short-term investments, and from other money market accounts.

Furthermore, a good liqudity position is beneficial in many ways and has no drawbacks. If these liquid funds are converted into investments, they work like a safety mechanism and offer reasonable returns. Such companies are often ready to face any financial crisis or backdrop, whereas businesses with short cash positions struggle in the market. An industry with a high liquidity position does not have to worry about taking loans or credits and can instantly purchase capital investments and machinery if required. But many critics believe that companies with good liquidity positions fear and fail to invest in new projects.

A cash position is determined by gauging the quick ratio and current ratio. Using the current balance means dividing a company's assets by its liabilities. Hence, calculating this position involves determining the total amount of cash and cash equivalents held by an individual, business, or investment portfolio at a specific point in time.

At the same time, using the quick ratio subtracts the inventory and less liquid assets, as selling the stock isn't a convenient option from the current assets. It follows the exact determination of dividing it into current liabilities. A higher current ratio reflects a strong cash position. Here is a guide on how to calculate this position:

• Identifying cash and cash equivalents
• Determining cash balances
• Include cash equivalents
• Exclude Restricted or Non- liquid funds
• Calculate the total cash positions

Therefore, it is essential to note that these positions fluctuate over time due to cash inflows, outflows, and investment activities.

Let us understand the concept better with the help of an example.

Example #1

Let’s assume Gerrard owns a battery manufacturing company. At the end of the financial year, he wants to check his business's liquidity position. Therefore, he first checks for the value of current assets, which is $180,000, and then Gerrard limits his liabilities, which amounts to $27,000.

When Gerrard divided them, the ratio came up to 20/3. It indicates that Gerrard's business holds a significant of this position. It is done using the current ratio.

But on the contrary, when Gerrard implied the quick ratio, the company had $90,000 in inventory. So Gerrard first subtracted the inventory value from the current assets to arrive at $90,000 as the new current assets.Again, dividing it with the current liabilities of $27,000 Gerrard reaches a ratio of 10/3.

Besides, it still shows that his business has an excellent net cash position even though he did not account for the inventory. Hence, it is a simply calculative example of liquidity position. However, many other factors go into consideration.

Example #2

In 2022, Gensight Biologistics, a French biopharma company, reported its cash position as of 31st December 2022 and revenues for 2022. Hence, the company has €12 million premium convertible notes with Heights Capital and €35 million conditional loan from the European Investment Bank. Thus, the CFO admitted to having secured good funding with minimal dilution.

Therefore, the company reported cash and cash equivalents amounting to €10.6 million and €13.9 million as of 30th September 2022. The company predicts finding multiple debt and equity financing sources in 2023 as its working capital requirements and operating expenses for 2024.

• Cash position is cash in hand at a given point, and cash flow refers to the varying net cash change relative to inflows and outflows.
• Though both are interlinked, a cash position is a business's money with liquid assets. In contrast, cash flow refers to profitability.
• This position reflects a company's credibility. In contrast, the cash flow points to a company are other income and expense streams.
• It is a simple ratio value derived from other financial ratios, and cash flows vary.

This has been a guide to Cash Position and its meaning. Here, we explain it with its examples, how to calculate it, and comparison with cash flow. You can learn more about it from the following articles –

• Forecasting Cash Flow
• Cash Budget
• Cash Pooling