What Is Cash on Hand? Definition and Tips

Updated 21 July 2022

Cash on hand is a critical component of responsible business operations. It can inform many decisions businesses make. If you want to maximise revenue, you may benefit from reviewing the idea of cash on hand. In this article, we define the concept, review the differences between cash on hand and petty cash and list some tips to help you maintain the right amount of cash available.

Related: What Is Compensation? (Definition and Types)

What is cash on hand?

Cash on hand, sometimes referred to as cash or cash equivalents, is the total amount of cash a business can access, whether from actual currency held on site or from its bank accounts and assets. Many business owners consider any asset they can liquidate into cash in 90 days or fewer as cash on hand. Sometimes, businesses have cash funds they can't spend, such as minimum deposits they have to leave in their bank. Business owners deduct this amount from their calculated cash to arrive at an accurate sum.

Differences between petty cash and cash on hand

When considering cash equivalents, it's important to consider petty cash and distinguish between the two and their business functions. Here are some of their key differences:

Asset types

Petty cash is the sum of physical cash in notes and coins that a business keeps on the premises. Companies often store it in a locked box or safe. The main purpose of petty cash is to enable business owners and managers to pay for minor daily expenses without having to write cheques or use credit cards.

Cash equivalents are usually not in cash form, but a mix of assets that business can easily convert to liquid cash. Petty cash is always physical, while cash on hand can include both physical and non-physical cash. A business can disperse it in registers, safes and employees' possession and as non-liquid funds, such as those stored in a bank.

Where are they located?

Businesses store cash equivalents and petty cash in different locations. Companies may store petty cash in a centralised location, such as a safe, where only permitted employees and business owners can access it. When petty cash is being accessed, those with access record each transaction in a petty cash book. This allows the business to account for all the minor expenses being covered with the funds. Businesses often decentralise cash equivalents and locate it in multiple physical locations and bank accounts.

How do they affect the financial health of a business?

Petty cash does not play a fundamental role in a business's financial health. Instead, petty cash is a convenience that makes paying vendors and buying small daily needs simpler. When a business runs out of petty cash, it can withdraw more cash from a bank. Many businesses only have a few hundred dollars of petty cash at a time.

Cash on hand is a key measure of a business's financial health. Companies may depend on cash on hand to pay vendors, rent and any other operational costs. When calculating how long a business could survive without meaningful revenue, business owners calculate their total cash to see how many months of costs they could pay. Business owners also need to know the total amount of cash they have on hand to generate the cash flow statements that detail their enterprise's financial value.

What purpose do they have?

Petty cash is a practical resource that helps avoid complicating transactions while also protecting companies' funds. For instance, if a business's sink needs repair, the manager can pay the plumber's $100 service fee in cash. If a manager needs to purchase more of a supply immediately but can't do it on their own, they can hand an employee petty cash to buy it. This avoids the risks of frequently handing out the business's credit card to many people.

The cash a company has on hand reflects its past performance and its present ability to operate. Unlike petty cash, which is for convenience, cash equivalents can ultimately perform any business function involving purchasing. Knowing the amount of cash you have on hand enables you to access credit, develop business strategies and fulfil accounting requirements.

Related: What Is Corporate Banking? Definition and Comparisons

Tips for determining how much cash to keep on hand

Having cash on hand is important, but being able to invest your cash to earn interest can help you meet your long-term financial goals. Each business requires a different amount of cash, so here are several tips to help you determine how much cash to have on hand:

Determine monthly operating expenses

When calculating the cash equivalents a business should keep, it's important to factor in a business's monthly operating expenses. These include your fixed overhead expenses, such as rent and bills and the variable costs of goods sold. After calculating the base monthly expenses, consider industry factors. If the business is highly seasonal or has recently experienced major changes, you may wish to adjust your base expenses to factor them in.

With those figures in mind, you can determine how much cash would benefit the business. Many businesses may benefit from having between three and six months' worth of operating costs on hand. This provides them with flexibility should unforeseen circumstances or challenges occur, so the business can adjust and continue to operate.

Related: 12 Commonly Used Accounting Principles

Consider effects of your industry and business model

Your industry and business model plays a significant role in determining how much cash you can keep. You may wish to consider the following factors:

The liquidity of your assets

If several of your non-cash assets are near liquidity, having more months of cash equivalents may be beneficial for a business. This helps a business have a backup plan in case of complications. For example, if a bank is closed on the day a company needs funds, their non-cash assets may be unreachable on that day.

The depreciation and appreciation of your wealth

If its primary assets are generally appreciating in value, a business may prefer to keep less cash equivalents. A real-estate development company is an example of this business-type. Its primary assets are land and homes, which reliably increase in value. If the business need funds, it could quickly sell a property, as they are also often worth a significant sum.

The flexibility of your spending situation

Consider the difference between mandatory and discretionary spending in a business. Mandatory spending is unavoidable. If the business has more discretionary expenses, you may find it possible to have less cash.

The industry the business is in

Different industries face different financial realities. A restaurant, for example, may operate on tight margins and have less cash equivalents than a business in the banking sector. A social media marketing agency may have a different financial reality than them both.

The age of the business

New businesses may have a less clear understanding of how their business volume may fluctuate throughout the year. As a new business learns more about the contraction and expansion of their business, they may feel more comfortable having less cash equivalents. To begin with, they may benefit from reserving more cash.

Assess opportunity costs

A business may prefer to distribute its wealth efficiently so it can take advantage of opportunities when they arise. However, opportunities often also come with some risk. An opportunity cost is a cost that comes from not taking the most profitable course of action. They're important to assess in relation to cash, as money in bank accounts may experience minimal growth. Conversely, money invested in bonds or other assets can yield significant returns.

For example, a theme park manager may have the opportunity to increase revenue by renovating ahead of the busy season. The manager may be confident that the renovation would yield profit in the future. In the short term, the business may have to operate with significantly fewer cash equivalents. Here, the manager may decide how much money the renovation requires and the risks it may create for the business in terms of diminishing the cash equivalents available for emergencies.

Account for future expenditures

When determining how much cash a business requires, it's important to consider future expenditures. Variable costs of labour, repairs and purchases can have a significant effect on a business's monthly profits. If you have any big purchases planned in 12 or more months, you may wish to keep more cash in reserves to account for that.

In doing so, take care to ensure that all your costs are being documented effectively. If there are multiple people in the business making purchases, there may be room for your reserves to be depleted faster than expected. You may benefit from taking the time to review expenditures and consider how they may affect the long-term financial goals of the business.

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