Cash Flow Projections: What is Cash Positioning?

Written by Kalei White
March 14, 2023

One of the most critical components of managing a business – whether it’s a local store or a huge, international conglomerate – is successfully managing cash. Cash is the lifeblood of any enterprise, reflecting your ability to pay operating expenses, expand, and insulate yourself from crises. You will want to be able to project cash flow to minimize risk.

But before managing cash, you need visibility into how much you have – whether that’s from month-to-month, week-to-week, or even day-to-day.

While this isn’t always as easy as it sounds, gaining this visibility is the aim of cash positioning.

In this article, we’ll go over the definition of cash positioning, different ways to calculate it plus key metrics, how it relates to forecasting, and tools that can help you.

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Cash Position Defined

Cash position is the amount of money a business has at any given time. By money, we really mean liquidity – cash and any other assets that can be quickly converted into cash (think certificates of deposit or marketable securities). Cash position asks: “if your business suddenly had to make a large amount of payments, what is the maximum amount it could afford?

The Importance of Cash Positioning

This is the main focus of cash position – how much liquidity you have in relation to liabilities. When paired with cash flow forecasting, cash positioning gives you a clear picture of how much you can invest in growth without jeopardizing your ability to pay short-term obligations. This lends you flexibility – the ability to react quickly to crises, for example, or take advantage of time-sensitive opportunities.

Cash positioning also helps you determine where your money is allocated. That’s because, to establish cash position, companies must assess every bank account. From there, treasury teams can ensure each has the appropriate amount of funds. This helps avoid bank fees such as overdraft and locates excess cash that can be used for expansion.

Overall, cash position is a solid, general evaluation of a company’s overall financial health. That’s why many investors will look at a business’s cash position before buying stocks. Banks will do the same before providing loans – a strong cash position can improve your access to financing.

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Can You Have Too Much Cash?

Since there’s no risk to holding it, cash makes an excellent reserve. But this feature also means it’s not doing anything for you – unlike mutual funds or targeted advertising, it won’t generate returns. In fact, thanks to inflation, it’ll most likely lose value over time. 

This is the problem of idle cash. Not only could that liquidity be better placed in smart investments, but too much idle cash can signal a company is stagnant, unable or unwilling to locate new avenues for growth.

For potential investors, this is a bad sign.

So, let’s clear up a common misconception: optimal cash positioning doesn’t necessarily mean having massive cash reserves. It’s more about finding balance – the right balance between having enough funds to afford liabilities and remain flexible, and enough to put to active use in your business and grow.

How to Find Your Current Cash Position

Establishing your cash position involves subtracting outflows from inflows. As easy as that is in theory, it’s not always simple in practice.

The first thing you’ll need is your most current cash position, which you can find on your quarterly cash flow statement.

First, ask how much time has passed since this number was current. If you’re one month into a new quarter, for instance, you’ll need to gather all inflows and outflows from the past 30 days – two months in, 60 days, and so on.

This is what treasury teams do – download .CSV files across bank accounts (and, potentially, currencies) and aggregate everything in Excel. 

Once you have clear records, add up all inflows and outflows. Then, subtract total outflows from total inflows. Add the result to the number on your quarterly cash flow statement, and you’ll find your current cash position.

To get a clear, ultra-granular view of your cash position, you’ll want to determine your new position at the end of each day. This allows you to take action quickly and ensure every bit of liquidity is being allocated to have the best long-term effect.

To do this, use the cash position you just found out as your starting point. Subtract all daily outflows from daily inflows, and add this result to your starting cash position.

This new number will be your starting cash position for the next day.

Sound like an operational nightmare? If you’re doing this manually, you’d be correct. (That’s where Trovata comes in!)

Understanding your current cash position is useful, but you’ll want to expand on this by understanding how your cash position compares to your liabilities. This is what liquidity ratios help you do.  

Liquidity Ratios

Liquidity ratios divide your current assets – including cash – by your current liabilities. 

There are two main types: current ratio and quick ratio. These are similar, but differ in which assets are included.

Current Ratio

The current ratio considers all assets that can be made liquid within one year. As such, it has a broader view of liquidity than the quick ratio.

The current ratio is: Current Assets (Cash+ Cash Equivalents + Accounts Receivable + Inventory) / Current Liabilities

Quick Ratio

The quick ratio, on the other hand, only includes assets that could be liquidated within 90 days. So, in contrast to the current ratio, it does not include inventory.

The quick ratio is: Current Assets (Cash + Cash Equivalents + Accounts Receivable) / Current Liabilities

Use the quick ratio if you want a more conservative estimate of liquidity.

What is a Good Ratio?

For the current ratio, you’ll want a result of 1.5 to 2.5. Say you get a result of 2. This means you have twice as much money in assets as you owe in liabilities, so you’re in a healthy position.

The current ratio is also a good way of seeing if you have too much idle cash. A result of 2.5-3 or higher can indicate your cash reserves are unnecessarily large.

For the quick ratio, a result of 1 or a bit over 1 is ideal. 

Whichever method you use, a result lower than 1 means you risk default – you’ll want to think about taking out financing, boosting revenue, and/or slashing expenses.

Other Important Metrics

Ratios aren’t the only way to measure cash position. Different metrics look at different aspects of liquidity, and all come together to paint a clear picture.

Working Capital

Working capital, for example, shows the specific amount of money you’ll have left after paying liabilities. Like the current ratio, it evaluates a period of one year.

The formula to determine working capital is: Current Liabilities – Current Assets

Operating Cash Flow

Operating cash flow is the amount of money your business generates from day-to-day operations.

The formula for operating cash flow is: (Net Income + Depreciation and Amortization) – Changes in Net Working Capital

You can find changes in net working capital on your balance sheet. 

Free Cash Flow

Free cash flow is the amount of liquidity available after paying operating expenses and capital expenditures (money that goes into purchasing and maintaining property and equipment).

The free cash flow formula is: Operating Cash Flow – Capital Expenditures

Days Sales Outstanding (DSO)

Making a sale rarely means you have access to that cash immediately. Days sales outstanding shows the average amount of time it takes your company to receive payment from sales. To determine your DSO for a year, you’d add up all accounts receivables and net credit sales over the past year.

Days Sales Outstanding formula: Accounts Receivables / Net Credit Sales x 365

The last number in the formula is the number of days. So, if you wanted to evaluate DSO for a quarter, you’d divide ARs over the past 90 days by net credit sales from the same period, then multiply by 90.

Days Payable Outstanding (DPO)

Days payable outstanding is the opposite of DSO – it shows how long it takes your business to pay its vendors and suppliers.

The formula for calculating DPO is: Accounts Payable x Number of Days Evaluated / Cost of Goods Sold  

For DPO, the cost of goods sold is represented as: beginning inventory + purchases – ending inventory

Cash Conversion Cycle (CCC)

Finally, DSO and DPO come together to help you determine your company’s cash conversion cycle. This is how long it takes to convert inventory and other investments into cash flow.

The formula to determine CCC is: DIO + DSO – DPO

DIO is Days of Inventory Outstanding – the average amount of time you hold onto inventory.

Cash Position and Cash Flow 

Cash position is not the same as cash flow, though it’s closely related. Whereas cash position means the amount of money you have right now, cash flow refers to inflows and outflows of money over a specific period of time (whether that’s daily, monthly, quarterly, etc.).

It’s your cash flow that determines your cash position.

This means that if you can estimate future cash flow, you should be able to get a good picture of your future cash position.

This is exactly what cash flow forecasts aim to do. Solid cash flow forecasts based on high-quality, accurate data act as a guide, a critical component of liquidity management.

How Technology is Changing Liquidity Management

Cash positioning and cash flow forecasting are the foundations of any successful liquidity management strategy. Automation is changing the way both are done. Combined with technologies like RPA, automation allows for near real-time insight into cash position across bank accounts and currencies.

Forecasts can be generated automatically and refined by machine learning, becoming more accurate over time.

All this frees up the treasury team to make the switch from data gathering to data analysis. Especially as a company grows, it gets more and more difficult to keep tabs on your entire financial situation.

While you could log into all these separate bank portals and record everything in Excel, this is far from optimal. For one, doing things this way won’t allow a real-time view, as it takes time – potentially tens of hours each month – to source information.

Recording all this data manually also carries a high risk of error. When data is flawed, you can’t firmly establish your cash position, and everything that follows, like cash flow forecasts, will be inaccurate.

Automation is the solution.

While treasury management systems have been at the forefront of the drive for automation, legacy TMS can be costly and take a lot of time to integrate. They also tend to be “bulky,” including many more features than might be necessary for the success of your operation – features that you’ll be paying for regardless.

Opt for a modern cash flow management platform built in the cloud, leveraging open banking APIs to connect securely and in less time than with a traditional TMS.

Get a Clear Line of Sight Into Your Cash Position Today

Cash positioning and cash flow forecasting are two of the most important things you can do for your business. With clear insight into liquidity, you know what you have and how you can use it to grow operations efficiently and sustainably.

Take a proactive approach to daily cash management with Trovata’s newest feature: Cash Positioning. Identify projected excess cash and call attention to balances that fall below a preferred target.

With our Cash Positioning tool, you can manage cash more effectively through things like overnight investing and loan repayments while decreasing the risk of overdrawing an account.

Want to see it in action? Schedule a Trovata demo today!

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