Businesses with a cash buffer are better prepared for unexpected delays in payment and expenses.

Just as individuals should have a rainy-day fund to cover emergency expenses, businesses should have money accessible to deal with slow times or unexpected bills. For businesses, this is called cash on hand. Here’s a quick look at what counts as cash on hand, how it’s used and how much businesses should have.

What is cash on hand?

Cash on hand is money a business can access within 90 days. It includes funds in business checking accounts and business savings accounts, physical cash, undeposited checks and other assets that can be converted into cash within 90 days.

If an account has a minimum balance requirement, that minimum is not counted as cash on hand, nor are accounts receivable.

How is cash on hand used?

Cash on hand serves as a reserve that can be used for operating expenses when incoming cash flow slows or to cover unexpected expenses.

Common reasons businesses tap into their cash reserves include customer payment delays and equipment repairs. Cash reserves might also be used to develop new products, test markets or take advantage of discount offers from suppliers.

Cash on hand gives a business the flexibility to cover expenses without delay and without taking on debt.

Businesses often measure their days cash on hand (DCOH). For example, if your business requires $2,000 per day to operate (including rent, payroll, utilities and inventory) and has $80,000 in accessible cash, it has 40 days of cash on hand. In this case, if all revenue were to halt, the business could continue operating for about 40 days, or nearly six weeks.

How much cash should a business have on hand?

A widely accepted guideline is to maintain cash on hand equal to three to six months’ worth of operating expenses. Another approach is to set aside 10% to 30% of annual revenue as cash reserves. Stable businesses with predictable revenue can go as low as 10%, while 30% may be more appropriate for businesses with inconsistent revenue and high growth.

How to set aside cash on hand

If you don’t already have sufficient cash on hand, there are several things you can do to boost your cash reserves. These include:

• Review pricing and ensure it aligns with current cost of goods and value delivered.
• Eliminate expenses where possible, including looking for waste or things that don’t generate revenue.
• Sell assets that are no longer used.
• Manage inventory so you don’t carry more than you need.
• Keep accounts receivable current. Learn how here.

New to managing a business?

There’s a lot to manage when running a business, especially if you’re just getting started. Our Consumers team is made up of experts who help local business owners reach their financial goals with our business services. Bring your questions about cash on hand—or any other banking topic—to one of our knowledgeable commercial loan officers.

 

All loans subject to approval. Rates, terms, and conditions are subject to change may vary based on credit worthiness, qualifications, and collateral conditions.