What is considered cash in hand?

Understanding Cash on Hand: A Company’s Liquid Assets

In the financial world, cash on hand refers to the readily accessible funds a company possesses after accounting for expenses. This crucial metric represents a company’s short-term financial liquidity and its ability to meet immediate obligations.

Cash on hand encompasses liquid assets that can be easily converted into cash within a short period, typically within 90 days. These assets include:

• Cash: Physical notes and coins held in a company’s possession or on deposit at a financial institution.
• Cash equivalents: Highly liquid investments with a short maturity period, such as treasury bills, money market accounts, and commercial paper.
• Marketable securities: Liquid investments that can be easily sold in the market, such as stocks and bonds.

Importance of Cash on Hand

Maintaining sufficient cash on hand is essential for several reasons:

• Meeting Daily Expenses: Companies use cash on hand to pay for day-to-day expenses, such as wages, rent, and inventory purchases.
• Managing Cash Flow: Stable cash on hand allows companies to smooth out fluctuations in cash flow, ensuring they can meet their obligations on time.
• Contingency Fund: Cash on hand acts as a buffer during unexpected events or downturns, providing a safety net for unexpected expenses.
• Investment Opportunities: Surplus cash on hand can be invested in growth opportunities or other value-generating activities.

Calculating Cash on Hand

Cash on hand is typically calculated using the following formula:

Cash on Hand = Cash + Cash Equivalents + Marketable Securities – Minimum Bank Balances

Minimum bank balances refer to funds held in a company’s bank account that are not readily available due to contractual agreements or bank requirements.

Exclusions from Cash on Hand

Cash on hand excludes certain funds that are not considered readily available, such as:

• Restricted Cash: Funds that are set aside for specific purposes, such as debt repayment or capital expenditures.
• Investments with Long Maturities: Bonds or other investments with maturities exceeding 90 days.
• Accounts Receivable: Amounts due from customers that have not yet been collected.

Conclusion

Cash on hand is a crucial indicator of a company’s financial strength and liquidity. Maintaining an appropriate level of cash on hand ensures a company can meet obligations, respond to unexpected events, and pursue growth opportunities. By carefully managing cash on hand, companies can optimize their financial performance and position themselves for long-term success.