Allianz Trade explains business cash reserve metric
Companies can measure their financial resilience using the Days Cash on Hand (DCOH) metric. This figure indicates how many days a business can operate using only its existing cash reserves if revenue stops.
Allianz Trade, a company specializing in trade credit insurance and collection services, has published guidance on understanding the Days Cash on Hand (DCOH) metric for businesses. This key financial indicator reveals the number of days a company can sustain its operating expenses using only its available cash and cash equivalents, should all incoming revenue cease.
The calculation of DCOH provides businesses with a critical tool for monitoring liquidity and preparing for unexpected financial challenges, such as sales slowdowns or unanticipated bills. The metric allows companies to make more informed decisions regarding spending and saving, ensuring that payroll and other daily operational costs can be met.
The formula for DCOH is calculated as: (Cash + Cash Equivalents) / (Average Daily Cash Outflows). Average daily cash outflows comprise a company's regular operating expenses, excluding non-cash items like depreciation. It is crucial to use the most recent financial statements and consider industry-specific benchmarks for an accurate assessment.
Allianz Trade emphasizes that a low DCOH figure can jeopardize a business's ability to meet its obligations, potentially necessitating external financing. A higher number offers a more substantial cushion and flexibility to navigate periods of reduced income or unexpected expenditures. The company also notes that trade credit insurance can play a role in safeguarding a business's cash reserves.