What’s Your Available Cash? An important, overlooked Financial Key Performance Indicator (KPI)

What’s Your Available Cash? An important, overlooked Financial Key Performance Indicator (KPI)

Available Cash: What’s Your Available Cash?  An important, overlooked FINANCIAL KPI (Key Performance Indicator)

Available Cash?  I recently got asked by a CFO a question, I thought worth sharing. “How much cash should we maintain on our balance sheet in our business’?  I believe its good for companies to have ‘available cash’ of a minimum of two months of operating expenses but ideally up to six months.  Here’s a look at that formula and why’s its important. 

The formula for calculating “Available Cash” is as follows:

Available Cash = (Cash + additional borrowing capacity) / Monthly operating expenses

Defined as:

  • Cash – is cash in the bank at the end of the month or at whatever point you do the calculation.
  • Additional borrowing capacity – is the additional amount you can borrow your bank, lender and/or investor. This in addition to however much you are currently borrowing. For most companies this is the available but unused portion on the Company’s line of credit.
  • Monthly Operating Expenses is defined as the average of all monthly operating expenses for the business. This would also include all expenses in Cost of Good Sold except material costs because material costs are usually already purchased and sitting in inventory.   You can also deduct (back out) depreciation expense because it’s a non-cash expense.

Example Calculation for Available Cash:

Here is an illustration of of the formula for available cash:

  • $100,000 Cash in the Bank
  • $800,000 Additional Borrowing Capacity
  • $900,000 Total Cash Available
  • $400,000 Monthly Operating Ex
  • 25 Months ($900,000/$400,000) = Total Available Cash

As shown above, this company has a little over two months worth of available cash.

Why Available Cash Is Important

Having a minimum amount of cash is key for so many reasons:  For one, companies with limited cash spend a lot of time managing cash flow which takes away time from growing or building the business. Also, companies without the cushion are vulnerable and can get backed into a corner where they must lay off employees, sell a portion of their Company at distressed prices or take on expensive financing (like merchant loans) that further hamstring and weaken the business.

Its probably obvious to say that keeping an adequate cash cushion is wise corporate financial planning.  Hopefully this post gives readers a target to meet or exceed.

Financing Gazelles Topic: Available Cash

Corporate Financial Planning Read More Recent Blog Posts Including:

How Do You and Your Team Use Corporate Financial Planning?

Getting More Capital Out of Your Bank

Using Capital To Grow Your Business

Management Buyout

Lantern Capital Advisors is a corporate financial consulting firm that helps growing companies find the financing solutions to fund their management buyout while keeping management in control and preserve and/or maximize ownership.

Learn More About Management Buyout

Growth Financing

Growth Capital Consulting

Lantern Capital Advisors helps growing entrepreneurial companies effectively plan and finance their growth using a corporate financial planning process that appeals to business owners and works consistently well.

Learn More About Raising Growth Capital

Owner Liquidity Financing

Owner Exit Strategy

Lantern helps companies secure capital from a variety of financing alternatives to help owners take capital out of their business and provide for some owner liquidity financing.

Learn More About Owner Exit Strategy and Owner Liquidity

Contact Lantern Capital Advisors…

Lantern Capital Advisors is a corporate financial consulting firm that helps growing companies secure financing from a variety of capital sources.  Our fees are based on our time and do not vary based on the financing or funding sources our clients choose.  Our corporate financial consulting fees are ofter a fraction of the cost of those charged by investment banks or brokers for a similar service.  Our process allows us to provide early feedback direct from funding sources within weeks of starting a project.

Contact Lantern Capital Advisors
Click Here

What Our Clients Say About Us…

“Chris is enjoyable and easy to work with which was really helpful given the demands of managing my growing business.”Howard Petty, CEO, Crosby Corporation, Washington DC
Contact Lantern Capital Advisors