Key Takeaways

  • Cash on hand refers to readily accessible funds a business holds for immediate needs and is crucial for operational flexibility and emergency expenses.
  • It differs from other liquid assets by being immediately spendable without conversion or processing delays.
  • Businesses should balance liquidity and opportunity cost when determining how much cash to retain on hand.
  • Benefits include readiness for emergencies, avoiding borrowing costs, and taking advantage of growth opportunities.
  • Planning tools like the "days cash on hand" metric help gauge financial resilience during revenue gaps.
  • Cash on hand does not typically include lines of credit or restricted funds and is distinct from petty cash in purpose and size.

Cash on hand comes in the form of money that a business has available at a certain time. Further, it is cash that a business has after it has paid all costs. When it comes to balance sheets, it shows that the balance held by a business is in the form of coins and notes. Unless a worker is paid in cash, they usually get paid in coins and notes, meaning there is a payment record.

Cash on hand is the funds available to companies that will be spent as necessary, instead of assets that must be sold to produce additional cash. The cash balance also determines the type of projects a company can begin, including any financial burdens that could be absorbed without borrowing money or going deeper into debt.

Note: You should ensure that you have sufficient cash available to take advantage of good deals when necessary.

Cash Account Variations

Cash may be important, but certain cash accounts are better than others. Depending on the location of your cash, it may determine your success or failure. If your company has no cash available, you must file for bankruptcy. With that, if your petty cash coffers are empty, this means that you’ll have to go to an ATM or bank.

The cash on hand is the cash balance that’s accessible. This means that it refers to all cash regardless of where it may be located.

Investments you may turn into cash in 90 days or less are usually included when assessing cash on hand. Petty cash is money that you can retain on hand to issue smaller payments in cases where you don’t want to use a credit card or check.

  • Example: If a worker spends $6.00 getting pencils, rather than writing the worker a check for him, you can pay him from your petty cash coffers.

The amount of petty cash needed depends on your requirements at the time. The amount varies anywhere from $50 to large balances, such as $200.

  • Example: Microsoft had over $50 billion in available cash. When it came to stock buybacks, dividends, or research costs, the available cash dropped to $26 billion. In addition, Apple’s cash on hand amounted to around $20 billion. In previous years, Microsoft could buy competing companies with no problem, while remaining at the top of the tech industry. Apple’s increased cash balance evened the playing field, allowing it to compete with Microsoft.

The petty cash balance you have is not important enough to have an impact on your company’s overall financial standing. For certain companies, petty cash may be cash in an undisclosed location that you use when someone needs direct cash. Moreover, it does not factor into consideration when creating financial statements. Even though financial statements usually do not mandate you to record petty cash, the cash balance of your petty cash is still part of cash on hand.

  • Note: You must determine your cash on hand balance to create cash flow statements.

A cash flow statement is a vital statement for start-up companies. Lenders use cash flow statements to assess the overall value of a business. If you have insufficient cash inflow, the cash on hand decreases and prevents you from paying debts.

Purpose and Benefits of Maintaining Cash on Hand

Maintaining an adequate amount of cash on hand serves multiple strategic purposes in business operations:

  • Operational Flexibility: Having liquid funds readily available allows businesses to cover day-to-day expenses such as payroll, rent, and utilities without delay.
  • Emergency Readiness: Cash on hand helps cushion financial shocks from unexpected events like equipment failures, economic downturns, or supply chain disruptions.
  • Avoiding Debt: Access to immediate funds reduces dependency on high-interest loans or credit lines during tight periods.
  • Growth Opportunities: Companies can capitalize on time-sensitive opportunities—like discounted inventory purchases or fast-moving investments—without financial hesitation.
  • Improved Vendor Relationships: Prompt payment capabilities can lead to early payment discounts and stronger supplier trust.

Having too little cash on hand may jeopardize your ability to meet obligations, while too much may signal inefficient capital use. A balanced approach is essential for healthy cash flow management.

Days Cash on Hand

Days cash on hand comprises the days that a company can operate in honoring expenses with the amount of cash that’s available. Owners/managers should be aware of such days in the following cases:

  • During the low end of a sales cycle season, especially in cases where there are no sales.
  • When a business starts and is not generating cash from sales.
  • During transactions regarding newer product lines, when previous sales from old products decline.

A key factor in assessing days cash on hand is if there is no cash flow from the sales. Rather, there are simple expenses in the form of:

  • Utilities
  • Rent
  • Salaries

To assess the amount of operating expenses, use an operating expenses subtotal in an income statement, and subtract the non-cash expenses (in the form of amortization and depreciation) and divide it by 365 to assess the cash outflow amount each day. Then, divide cashflow each day into the total balance of cash on hand.

Cash on Hand vs. Petty Cash

While often confused, cash on hand and petty cash are distinct:

Cash on Hand Petty Cash
Broader concept encompassing all available cash Specific subset used for small, day-to-day expenses
May include bank account balances and physical cash Typically stored in a lockbox or drawer
Used for operational needs, emergencies, or large purchases Used for minor, immediate expenses (e.g., office supplies)

Understanding the difference is important for accurate financial reporting and cash management.

What Is Included in Cash on Hand?

Cash on hand includes more than just physical money stored in a register or safe. It typically covers:

  • Physical Currency: Bills and coins immediately available for use.
  • Balances in Checking Accounts: Funds that can be accessed instantly via checks or debit transactions.
  • Petty Cash Funds: Small amounts set aside for incidental expenditures.
  • Cash Equivalents: In some cases, short-term investments (like treasury bills) maturing within 90 days may be counted, provided they are highly liquid and low-risk.

However, cash on hand does not include:

  • Restricted cash (e.g., cash held for legal obligations or collateral).
  • Accounts receivable or inventory (as these require conversion).
  • Credit card balances or unused lines of credit.

How to Determine an Appropriate Cash on Hand Amount

Determining how much cash on hand your business should retain depends on several factors:

  1. Nature of the Business: Retail and food service businesses typically need more cash on hand than service-based businesses with predictable billing cycles.
  2. Seasonality: Businesses with fluctuating sales should maintain higher reserves to navigate off-seasons.
  3. Access to Credit: Companies with reliable access to credit lines might safely keep less cash on hand.
  4. Expense Patterns: Calculate average daily operating expenses to estimate how much cash should be available to cover 30–90 days of expenses.
  5. Growth Stage: Startups may need more liquidity than established firms due to uncertain revenue patterns.

A good rule of thumb is to maintain enough cash to cover at least one to three months of operating expenses.

Frequently Asked Questions

  1. Why is cash on hand important for a business?
    Cash on hand ensures a business can meet immediate financial obligations, manage emergencies, and seize growth opportunities without relying on debt.
  2. How do I calculate days cash on hand?
    Divide your cash on hand by your average daily operating expenses (excluding non-cash costs like depreciation) to get the number of days you can operate without new income.
  3. What is considered cash on hand for accounting purposes?
    It includes physical currency, balances in checking accounts, and sometimes short-term cash equivalents that can be converted within 90 days.
  4. Is petty cash included in cash on hand?
    Yes, petty cash is part of cash on hand, but it represents only a small portion designated for minor, incidental purchases.
  5. How much cash on hand should a business keep?
    It varies, but a common guideline is to retain enough cash to cover one to three months of operating expenses, depending on business type and risk tolerance.

To learn more about cash on hand, you can post your job on UpCounsel’s website. UpCounsel’s lawyers will give you more information about cash expenses for your business and how you can properly manage your business accordingly. In addition, they will defend your rights in court if your business faces a lawsuit.