Understanding Days Cash on Hand: Definition and Basics

Definition:
Days Cash on Hand (DCOH) is a liquidity metric that estimates the number of days a company can continue to pay its operating expenses using only its available cash and liquid assets, without needing to generate additional revenue or tap credit lines.

Formula:

Days Cash on Hand =
Cash and Cash Equivalents ÷
(Operating Expenses – Non-Cash Expenses) ÷ 365

Where:

• 

  Cash and cash equivalents include bank deposits and marketable securities.

• 

  Operating expenses are the total costs to run the organization, excluding capital expenditures.

• 

  Non-cash expenses typically refer to depreciation or amortization.

Purpose & Use:

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  Measures short-term financial resilience.

• 

  Commonly used in industries with variable revenue streams (e.g., healthcare, education).

• 

  Helps stakeholders assess whether the organization can survive a revenue shortfall or crisis.

• 

  May be used by creditors and investors as a sign of financial health.

Interpretation:

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  Higher DCOH: Greater liquidity cushion; suggests the organization can withstand periods of revenue disruption.

• 

  Lower DCOH: Potential cash flow risk; the organization may need to rely on borrowing or asset liquidation to stay solvent.

There is no universal benchmark for a “good” DCOH. It varies significantly by industry and organization size.

Limitations of Days Cash on Hand:

Days Cash on Hand is inherently a backward-looking metric, based on historical operating expenses. It doesn't incorporate upcoming changes in cost structure, revenue trends, or strategic cash flow plans. As such, it offers only a snapshot of past liquidity rather than a forward-looking view of financial resilience.

It also fails to account for seasonality in the business. Companies with cyclical revenue or expense patterns—such as retailers, event-driven businesses, or agriculture firms—might show artificially high or low DCOH depending on when it's calculated. Without considering timing effects, the metric can give a false sense of security or urgency.

Example:
If a company has $5 million in cash and annual operating expenses of $36.5 million (after adjusting for non-cash items), its DCOH would be:

Days Cash on Hand =
5,000,000 ÷ (36,500,000 ÷ 365)
= 50 days

This means the company could continue paying its daily expenses for 50 days without additional income.