When a firm has cash on hand, it means that it may access that money in case an unforeseen expenditure arises. It can also refer to any short-term liquid investment, such as money market funds or liquid assets that can be swiftly converted to cash. It is not usually used to refer to actual cash.

Cash on Hand: An Example and Definition

After normal costs have been paid for, cash on hand is effectively a cash reserve. Generally regarded as funds set aside for “rainy day” circumstances, cash on hand may be used for a variety of reasons, whether it’s to offset a spike in rent, take advantage of beneficial investment opportunities, or cover expenses associated with damage to equipment.

Actual cash and money in a company checking account are two examples of different types of cash on hand. As part of their cash on hand, firms also include assets that may be rapidly liquidated or sold; this is particularly helpful when they don’t have a lot of cash on hand. 1

The equivalent of a company’s cash, cash equivalents, and other short-term assets that may be immediately liquified in the event that money is needed as an example would be cash on hand.

Various businesses may have different perspectives on the definition of liquid assets as cash on hand, the speed at which they may be exchanged, and the appropriate amount of cash on hand. This may rely on a variety of elements, including the sector and the location.

How to Use Cash on Hand

Similar to a savings account, cash on hand is spent but only when absolutely necessary. Money is set aside for “rainy days” or to pay for pressing costs associated with maintaining the operation of the company. It’s critical to calculate money correctly to make sure that cash on hand can meet these additional or unforeseen expenses.

Typically, cash on hand is computed by figuring out the company’s cash flow. The term “cash flow” describes how much money is coming into and going out of a company. Sales from consumers would be included in the cash coming in, whereas the cash going out would, for example, be money paid to cover the cost of inventories.

A cash flow forecast, which is an estimation of the cash inflows and outflows in a certain period, may be useful to businesses. A more precise picture of the anticipated cash on hand may be given by calculating the balance on the cash flow statement.

Here is a quick formula to determine the appropriate level of cash on hand for your company.

(Total Annual Expenses / 12) x [3, 4, 5, 6, n] months = Cash Reserve
  • Your goal should be to have enough cash on hand to last for the number of months indicated in the brackets. As a general guideline, you should keep three to six months’ worth of operational costs in cash on hand.
  • To calculate your entire business costs for a particular year, consult your cash flow statement.
  • To estimate your normal monthly spending, divide your overall costs by 12. Add that amount to the number of months you calculated before. The best amount to retain in your cash reserves will be that amount to keep in your cash reserves.