What it means
Treasurers and finance managers check the cash position every day, sometimes several times a day in larger firms. A balance sheet only gives you a snapshot at the period end, whereas the cash position is a live figure that guides decisions on paying suppliers, funding payroll and investing surplus money.
The starting point is the bank balance, but the bank balance alone can mislead. Cheques you have written but which have not yet cleared will reduce it soon, and customer payments that have been posted may not yet be available to use.
Many companies therefore calculate a net cash position, taking cash and near-cash assets and subtracting overdrafts and short-term commitments already due. Some also add expected receipts and deduct expected payments over the next week or month to create a forward-looking cash position.
The figure is most useful when it is paired with a measure of how fast cash is leaving the business. A $300,000 position sounds comfortable until you learn that the business spends $150,000 a month, which means only two months of runway.
For startups and growth companies the cash position is a survival metric, and investors ask for it constantly. For mature businesses it is a planning tool that shows when to borrow, when to repay debt and when to place spare funds in an interest-earning account.
Banks and investors also read the cash position as a signal of discipline. A business that can state its position quickly and accurately tends to be trusted with credit lines, better supplier terms and, in a fundraising, a smoother due diligence process.
In practice
Real-world examples
Example 1
A founder of a subscription software business looks at her dashboard on Monday morning and sees a net cash position of $420,000. With monthly outflows of $60,000, she knows she has seven months of runway and can plan a hiring round with confidence. She reviews the figure again after each new hire so the plan stays honest.
Example 2
A retailer's treasury clerk notes that the bank shows $95,000, but $40,000 of supplier cheques will clear this week. The true position is $55,000, so the clerk delays a planned equipment purchase. The purchase is rescheduled for the following week, after a large customer payment is due.
Example 3
A manufacturing group with several subsidiaries pools its balances daily. The group-level cash position of $2,600,000 lets it repay a revolving credit line early and save interest rather than leaving money idle in separate accounts. The saving is small each day but adds up over a year.
Think of it
Your cash position is simply how much money is in your accounts right now-your immediate available funds.
Formula
Calculation
Net cash position = Bank balances + Cash on hand + Cash equivalents - Overdrafts - Uncleared payments
A trading company has $180,000 in its current account, $2,000 of petty cash, $50,000 in a money market fund that can be redeemed in a day, and cheques totalling $22,000 that have been issued but not yet cleared. Net cash position = $180,000 + $2,000 + $50,000 - $22,000 = $210,000. If the company's monthly cash costs are $70,000, runway = $210,000 / $70,000 = 3 months.Case study
Seen in the real world
Brightwater Logistics is an illustrative, fictional haulage company that relied on its monthly bank statement to judge how much it could spend. In one month the statement showed $150,000, so the owner approved the purchase of two used trucks for $140,000.
What the statement did not show was $90,000 of fuel and tyre invoices due that week and a $30,000 loan instalment taken by direct debit three days later. After the purchase, the company could not meet its commitments and had to ask a supplier for a short extension.
The finance manager introduced a simple daily cash position sheet listing balances, cleared and uncleared items, and the next 14 days of known payments. The sheet took ten minutes a day to update, and the owner quickly came to rely on it. A purchase that once would have been approved on a hunch now needed to pass a simple test: would the position stay above the agreed minimum after the payment? In the illustrative months that followed, big purchases were only approved once the forward position showed enough headroom.
Watch out
Common mistakes
- Reading the bank balance as the cash position without deducting cheques and payments already committed.
- Counting cash that is restricted, such as customer deposits held on trust or money pledged to a lender, as freely available.
- Looking at the cash position only at month end, when the real pressure points are the days before payroll and tax deadlines.
Questions
People also ask
How often should a business check its cash position?
Small businesses should do it at least weekly, while firms with high transaction volumes or tight liquidity usually do it daily.
Is cash position the same as net working capital?
No, because working capital includes inventory and receivables that are not yet cash, whereas cash position looks only at cash and near-cash.
Should an overdraft be treated as part of the cash position?
Most treasurers show the overdraft as a deduction, or show the position net of it, because the facility is borrowed money that must be repaid.
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