Days Cash on Hand

How to Calculate Days Cash on Hand (Step-by-Step)

The days cash on hand metric is applicable for early-stage startups that are not yet cash flow positive, as well as any company in a situation where there will be no (or minimal) discretionary cash brought in from operations.

In short, the days cash on hand is the estimated number of days that a company can sustain its operations – i.e. pay off all of its required operating expenses – using only its cash on hand.

That said, an important assumption in calculating this conservative metric is that there will be no cash flows generated (or kept) from sales, i.e. meeting near-term operating expenses is entirely reliant on the cash on hand.

Most companies that track this metric are in a relatively risky state of operations. The most common operating expenses are the following:

• Employee Salaries
• Rental Expense
• Utilities
• Insurance

Since the metric is cash-oriented, all non-cash expenses such as depreciation and amortization must be deducted, i.e. these items do not represent actual cash outflows, but are rather recorded for accrual accounting purposes.

The next step is to divide that resulting amount by 365 – the number of days in a year – to determine the dollar amount of cash spent each day.

In the final step, the total amount of cash on hand belonging to the company in question is divided by the daily cash spend.

The days cash on hand is thereby an approximation of the amount of time that a company can withstand a lack of cash flow and continue to operate day-to-day while covering all operating expenses with the cash available at the present moment.

The shorter the resulting duration, the more cost-cutting initiatives must be implemented to ensure the company can carry through and survive a crisis-like period.

If all cost-cutting measures have been exhausted, the only hope is often to seek outside external financing, which may not always be an option.

Days Cash on Hand Formula

The formula for calculating the days cash on hand metric is as follows.

Calculating the numerator should be straightforward, as it represents the amount of cash a company possesses at the current moment.

In addition, any highly liquid cash equivalents such as marketable securities, commercial paper, and short-term investments should be included in the figure.

The operating expense burden can be calculated using the amounts reported on the income statement, but any non-cash expenses like depreciation and amortization (D&A) must be deducted.

Days Cash on Hand Calculator – Excel Model Template

We’ll now move on to a modeling exercise, which you can access by filling out the form below.

First Name *

Email *

Submit

By submitting this form, you consent to receive email from Wall Street Prep and agree to our terms of use and privacy policy.

Email provided

Your Download is Ready

Submitting...

Startup Days Cash on Hand Calculation Example

Suppose a startup currently has $100,000 in cash and cash equivalents.

For the time being, the startup anticipates no cash flows caused by unforeseeable events and must now determine how long it can continue operating using the cash on hand.

If the annual operating expense is $450,000 while the depreciation and amortization expense is $20,000, how many days does the startup have to come up with a plan to obtain financing or figure out a way to generate cash?

The inputs for our calculations have been listed below.

• Cash on Hand = $100,000
• Annual Operating Expense = $450,000
• Depreciation and Amortization (D&A) = $20,000
• Annual Cash Operating Expense = $450,000 – $20,000 = $430,000

After subtracting the non-cash component from our startup’s operating expenses, we must then divide the annual cash operating expense ($430k) by 365 days to arrive at a daily cash operating expense of $1,178.

• Daily Cash Operating Expense = $430,000 ÷ 365 Days = $1,178

The remaining step is to divide the cash on hand by the daily cash operating expense, which comes out to 85 days as the estimated time our hypothetical startup can fund its operations using its cash on hand.

• Days Cash on Hand = $100,000 ÷ $1,178 = 85 Days