“I don’t get it”, “I hated it in school”, “It’s too complicated”. These are statements I’ve heard from SMB owners, and they’re right! Accounting and finance can be complicated and difficult to understand. But what if it were simple? What if you got exactly the information you needed in an easy to understand format? If owners and non-financial managers received the story that financial reports are telling instead of the reports themselves, they’d be on their way to loving finance.
One of the areas that all business owners should understand is cash flow, more specifically Days Cash on Hand (DCOH). So, what is DCOH and what is the story it tells? It’s the number of days that a business can continue to pay its operating expenses, based on the amount of cash they have. Now, I could go into the calculation and have a long discussion about it (If you’d like to get that you can find it here), but that’s where the problems start! The only thing you really need to know is what DCOH means and how you can use it.
Businesses need to know what their future cash flow looks like and how many days of cash they have. If you’re a business owner, you simply want to know where you stand with this number. So, if you always want to have 30 days of cash on hand, all you need is the number – not the calculation. If it’s less than 30, you need to review it, if it’s more than 30, you’re in decent shape. Some business owners are comfortable figuring out how many days of cash they need, but if you’re not, you can ask your accountant. Once you have the answer, the only thing you need is a tool that will deliver the DHOC number and if it’s low so you can review it.
The world of finance is filled with reports and calculations providing valuable information. In this blog, we’ll continue to look at reports, formulas and ratios that can be confusing and simplify them so that SMB’s can understand the story behind them and what that story tells you about your business.
Special thanks to https://www.accountingtools.com for the days cash on hand description.