What is a Cash Position?

A company’s cash position is the cash amount it currently has on its books relative to expenses and liabilities.

A cash position can factor in highly liquid assets like short-term government debt and certificates of deposit in addition to cash.

A company with a strong cash position has ample liquid assets and strong financial strength. Cash position is closely monitored by internal stakeholders, while analysts and outside investors monitor it on the cash flow statement created every month or quarter. 

How do you measure a cash position?

A company’s cash position can be gauged by examining liquidity ratios like current ratio and quick ratio. Current ratio is calculated by taking current assets and dividing by current liabilities. A higher current ratio indicates a better cash position.

For example, Company A has $300,000 in current assets and $150,000 in current liabilities. By dividing current assets by current liabilities, you reach a current ratio of 2:1. A ratio over 1 indicates a company has enough cash for continued operations. With a ratio of 2:1, Company A has a strong cash position.

Let’s look at another example, this time using a quick ratio. A quick ratio is like a current ratio except it doesn’t factor in inventory and other less liquid assets. Company B has $100,000 in current assets, $20,000 in inventory, and $100,000 in current liabilities.

First, subtract the inventory from current assets to equal $80,000. Next, divide $80,000 by current liabilities of $100,000 to get a quick ratio of 4:5. Company B has a quick ratio below 1, meaning it has a weaker cash position.

What is the difference between cash position and cash flow?

Cash position measures a company’s cash on hand at a specific moment. Cash flow is the net change resulting from cash outflows and inflows over time. Both help determine a company’s financial strength and liquidity.

A company with positive cash flow can more easily pay for expenses and liabilities. Cash flow is calculated by taking the end of period cash balance, or closing balance, and subtracting the beginning of period cash balance, or opening balance.

Cash flow can be interpreted using the cash flow statement. It’s separated into three categories called operating cash flows, investing cash flows, and financing cash flows.

Daily inflows and outflows are put on the operating cash flow section. These include transactions like customer payments, product production expenses, and delivery expenses.

Investments and transactions meant for expanding the business are put on the investing cash flow section. These include transactions like asset sales and purchases, acquisition payments, and supplier loans.

Transactions with stakeholders and investors are detailed in the financing cash flow section. These include company dividends, cash inflows from investors, and payments to banks.

Cash position is the amount of cash a company has at a specific moment in time. It is measured relative to expenses and liabilities, and it helps reveal a company’s liquidity and financial strength.

It is measured by calculating liquidity ratios like current ratio and quick ratio. Cash flow also helps determine financial strength, but it measures the change in inflows and outflows over time. The cash flow statement, which is separated by operating activities, investing activities, and financing activities, is helpful for monitoring a company’s cash position.