Читать книгу Accounting For Dummies - John A. Tracy - Страница 50

Cash is the lubricant of business activity. Realistically, a business can’t operate with a zero cash balance. It can’t wait to open the morning mail to see how much cash it will have for the day’s needs (although some businesses try to operate on a shoestring cash balance). A business should keep enough cash on hand to keep things running smoothly even when there are interruptions in the normal inflows of cash. A business has to meet its payroll on time, for example. Keeping an adequate balance in the checking account serves as a buffer against unforeseen disruptions in normal cash inflows.

At the end of the year, the company in our example has $11.281 million cash on hand (refer to Figure 2-2). This cash balance is available for general business purposes. (If there are restrictions on how the business can use its cash balance, the business is obligated to disclose the restrictions.) Is $11.281 million enough? Interestingly, businesses do not have to comment on their cash balance. We’ve never seen such a comment in a financial report.

The business has $4.213 million in operating liabilities that will come due for payment over the next one to three months (see Figure 2-2). Therefore, it has enough cash to pay these liabilities. But it has just barely enough cash on hand to pay its operating liabilities and its $7.0 million interest-bearing debt. Lenders don’t expect a business to keep a cash balance more than the amount of debt; this condition would defeat the very purpose of lending money to the business, which is to have the business put the money to good use and be able to pay interest on the debt.

Lenders are more interested in the ability of the business to control its cash flows so that when the time comes to pay off loans, it will be able to do so. They know that the other, non-cash assets of the business will be converted into cash flow. Receivables will be collected, and products held in inventory will be sold, and the sales will generate cash flow. So you shouldn’t focus just on cash; you should look at the other assets as well.

Taking this broader approach, the business has $11.281 million in cash, $8.883 million in trade accounts receivables, and $1.733 million in inventory, which adds up to $21.897 million in cash and cash potential. Relative to its $11.213 million in total liabilities ($4.213 million in operating liabilities plus $7.0 million of debt), the business looks like it’s in pretty good shape. On the other hand, if it turns out that the business isn’t able to collect its receivables and isn’t able to sell its products, the business would end up in deep doo-doo.

One other way to look at a business’s cash balance is to express its cash balance in terms of how many days of sales the amount represents. In the example, the business has an ending cash balance equal to 58 days of sales, calculated as follows:

 $71.064 million annual sales revenue ÷ 365 days = $194,696 sales per day

 $11.281 million cash balance ÷ $194,696 sales per day = 58 days

The business’s cash balance equals almost two months of sales activity, which most lenders and investors would consider adequate.