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

AVAILABLE CASH overlooked FINANCIAL KPIAvailable 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

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