How to calculate company cash requirements

Calculating cash on hand requirement of company

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Hi all

How do you go about calculating the cash on hand a business requires?

Net working capital tells me £1M (debtors £1.2m plus stock £700k less payables of £900k) 

Payables days are 66 days, receivables 60 days and stock is 70 days but not sure if relevant?

However this seems like a crazy amount of cash to keep on hand. And our net cash flow each month is positive so this £1m will continue to grow and not get used up.

 

I can see how £1m would be the case for a new business start up in the first month to two months,  but for ongoing established company’s should we be looking at an incremental calculation based on the above?

Thoughts welcomed or advice on how you set your target bank balance appreciated. 

Replies (3)

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By WhichTyler
20th Mar 2018 07:08

The sum you have done does not represent the amount of cash you need to keep on hand, but the amount you need to finance if you have no cash. If you have £1m on top of that, you have c£2m of reserves (plus any fixed assets)

Future cash requirements will be determined by business cycle, investment needs, capital replacement and dividend policy. You will need to do a cashflow forecast.

Thanks (1)
avatar
By WhichTyler
20th Mar 2018 07:08

The sum you have done does not represent the amount of cash you need to keep on hand, but the amount you need to finance if you have no cash. If you have £1m on top of that, you have c£2m of reserves (plus any fixed assets)

Future cash requirements will be determined by business cycle, investment needs, capital replacement and dividend policy. You will need to do a cashflow forecast.

Thanks (1)
avatar
By WhichTyler
20th Mar 2018 07:08

The sum you have done does not represent the amount of cash you need to keep on hand, but the amount you need to finance if you have no cash. If you have £1m on top of that, you have c£2m of reserves (plus any fixed assets)

Future cash requirements will be determined by business cycle, investment needs, capital replacement and dividend policy. You will need to do a cashflow forecast.

Thanks (1)