Find the amount of a company’s cash, cash equivalents and restricted cash, if any, listed on its balance sheet. Cash equivalents are sometimes listed as short-term investments. Restricted cash is cash that is unusable due to a prior commitment, such as a contract, and is listed separately from cash.
Add the amount of the company’s cash and cash equivalents and subtract its restricted cash. For example, add $500,000 in cash and $300,000 in short-term equivalents, and subtract $50,000 in restricted cash. This equals $750,000 in unrestricted cash and cash equivalents.
Find the amount of the company’s total operating expenses and depreciation expense for an accounting period on its income statement.
Subtract the amount of the company’s depreciation expense from its total operating expenses for the accounting period to determine its cash operating expenses. You must subtract depreciation expense because a company does not pay any cash for depreciation, which is only an accounting expense. For example, subtract $150,000 in annual depreciation expense from $1.05 million in total annual operating expenses. This equals $900,000 in total cash operating expenses.
Divide the company’s total cash operating expenses for the accounting period by the number of days in the accounting period to determine its cash operating expenses per day. In the example, divide $900,000 in total annual cash operating expenses by 365 days in the accounting period. This equals $2,466 in cash operating expenses per day.
Divide the amount of the company’s unrestricted cash and cash equivalents by the amount of cash operating expenses per day to determine the days of cash-on-hand ratio. In the example, divide $750,000 by $2,466, which equals 304.1 days of cash-on-hand. This means the company has enough cash on hand to pay its expenses for approximately 304 days.