Days Cash On Hand

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21 Aug, 2024

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Table Of Contents

What Is Days Cash On Hand (DCOH)?

Days Cash on Hand (DCOH) refers to a financial tool or metric, allowing a business to measure the number of days it can meet its operational expenses with the existing cash in hand. It helps assess liquidity and financial health and enables financial forecasting and planning.

It is derived by dividing cash on hand by average daily operating expenses. A higher DCOH means a financially stable firm, but it also indicates inefficient cash usage. Businesses gain important insights concerning their financial health by analyzing DCOH. They use it to make informed business decisions, leading to long-term benefits.

What Is Days Cash On Hand (DCOH)?

Days Cash On Hand outlines the duration for which a company can comfortably cover its expenses with available cash. It facilitates liquidity evaluation, financial projection computations, and industry comparisons.
It quantifies how long an organization’s cash will be sufficient to run its operations without external funding. This figure is a crucial element of financial planning and benchmarking against peers.
DCOH is important because it measures liquidity and resilience, informs decision-making, attracts investors, boosts creditworthiness, and gauges financial health for operational continuity, especially in healthcare.
It can be calculated by dividing the available cash by the total amount of operating expenses, which is to be retrieved from the financial records maintained by the business.

Days Cash On Hand Explained

Days Cash on Hand (DCOH) highlights the number of days a business can cover its operational expenses using existing cash reserves without needing external funding. By doing so, a company assesses its financial health and liquidity. Moreover, it is a vital aspect of treasury operations and Liquidity Management.

, enhancing organizational liquidity and preventing possible losses arising from fraud.

To understand how it works, one needs to focus on two crucial aspects - average daily expenses and cash on hand. Cash on hand refers to a firm's existing or current cash reserves. Further, by subtracting non-cash expenses from annual operating expenses and then dividing the result by 365 days, one can calculate the average daily expense. This figure has significant implications for various establishments, such as hospitals, non-profit organizations, and retail stores, that require high levels of liquidity for smooth operations.

Through DCOH, one can easily understand the ability of a business to sustain operations and detect cash flow issues, if any. This number highlights potential difficulties in achieving short-term obligations and possible financial risks, too. Meeting short-term commitments like rent, supplier payments, salaries, etc., can be challenging if the DCOH is adversely affected.

A high DCOH value reflects conservative financial management. It indicates weak cash utilization ability, meaning the company is unable to use its cash reserves effectively. This could be due to unsound investment strategies, the absence of growth initiatives, or over-reliance on cash.

From an investor’s viewpoint, a high DCOH value indicates high liquidity and the ability to weather financial shocks. Hence, investors find such companies less risky since they feel assured of receiving stable returns. A high DCOH figure also indicates that the company values financial prudence and avoids excessive debt or external funding. This is another reason that attracts investors who value long-term financial sustainability.

A company’s management makes informed decisions about financing, investing, and dividend payouts by studying DCOH in conjunction with other tools. DCOH enables companies, especially not-for-profit organizations, to keep sufficient cash reserves to sustain their operations and meet goals in times of financial hardship. It helps develop cash reserve goals. It allows non-profits to compare their liquidity position against industry benchmarks and change strategies or policies accordingly. Organizations can plan their expenses and ensure operations sustainability in uncertain periods using this indicator.

Formula

One can find out the DCOH value by dividing the available cash by the total amount of operating expenses. One has to first figure out the operating expenses, which do not include money from financing and investing activities. Now, extract other expenses not involving cash, such as amortization and depreciation. These figures are available in an organization’s financial records or statements. The non-cash expenses are subtracted from the total operating expenses. Finally, the result obtained is divided by the total number of days, which is 365 days, to obtain the per day cash outflow or DCOH.

Mathematically, the days cash on hand calculation is expressed as:

Days Cash on Hand = Cash on hand /

For instance, a hospital's financial evaluation (days cash on hand hospital) considers the days cash on hand ratio calculated using a specialized days cash on hand calculator to assess its operational liquidity.

Examples

Let us study a few examples to understand the topic.

Example #1

A November 2023 news report about the days cash on hand at the University of Arizona (UA) talks about the troubled state of affairs at the university. The university’s DCOH value was 97 days when reviewed last, and the board was given time till December 15 to revive this balance to equal at least 120 days worth of cash on hand.

The faculty believes that financial mismanagement is at the core of this problem, with a whopping $240 million being mismanaged. They also believe that accounting errors and incorrect projections have magnified the problem.

UA’s Chief Financial Officer, Lisa Rulney, said that though the estimated number was 156, the funds were sufficient only for 97 days. She said this occurred due to problems with the university’s revenue-projection model. Some other UA officials gave further input regarding this figure, stating that certain university initiatives and programs led to an increase in expenditure while the expected increase in revenue did not materialize.

This shows that the DCOH is a critical parameter that ensures the smooth functioning of an organization.

Example #2

Suppose XYZ Corporation in San Francisco has $8 million in cash, $10 million in annual operating expenses, and a non-cash expense of $1 million annually.

Cash on hand = $8 million

Annual Operating Expenses = $10 million

Non-cash Expenses = $1 million

Applying the formula:

Days Cash on Hand = Cash on hand /

Therefore, DCOH = $8 million / (($10 million - $1 million) / 365)

= $8 million / ($9 million / 365)

= $8 million / 24,657

= approximately 324 days

This indicates XYZ Corp can sustain its operations for approximately 324 days using its available cash after factoring in operating expenses and depreciation.

Importance

Days Cash on Hand (DCOH) is vital in assessing short-term financial health and readiness to tackle unexpected disruptions. It is important for financial evaluations across sectors. This section discusses the importance of DCOH.

Liquidity Indicator: DCOH helps an organization use available cash to gauge and manage operational sustainability without relying on external funding.
Resilience: A healthy DCOH protects organizations from economic downturns, supply chain interruptions, and cash flow challenges, among other problems.
Cash Flow Cushion: By providing a buffer of readily available cash, a healthy DCOH offers a solid safety net in times of financial turbulence.
Informed Decision-Making: It facilitates long-term funding and strategic investment decisions.
Investor Interest: A healthy DCOH attracts potential investors interested in earning stable returns by indicating financial stability.
Creditworthiness Boost: A strong DCOH improves borrowing capacity and credit rating.
Operational Continuity: A healthy DCOH is a safeguard against unanticipated interruptions or fluctuations in revenue. It improves an organization’s resilience and risk-taking abilities.
Stability Benchmark: It shows the stability and capacity of a corporation to meet its financial obligations.

Frequently Asked Questions (FAQs)

1. What is a good days cash on hand ratio?

Each sector and firm has a different good days cash on hand ratio. However, a ratio of 30-90 days is typically seen as good as it shows that there is enough liquidity to pay operational costs for a fair amount of time.

2. How many days cash on hand should a hospital have?

Compared to other industries, hospitals usually have a higher days cash hand ratio because of their high operational costs and fluctuating income sources. For hospitals, a ratio of 150–273 days is recommended.

3. How many days cash on hand should a business have?

The industry, business plan, and risk tolerance of a company typically determine how many days cash on hand is optimal. A larger, more established company may be able to work with a lower ratio (30–60 days), while a small firm may need a higher ratio (90–120 days) for greater financial stability.

4. Does days cash on hand include interest expense?

Interest expense is not included in days cash on hand. This is so because interest is a non-cash item.