What it means
The starting point is the group's total cash, which is rarely one number. A business with several bank accounts, foreign currency balances and money market deposits has to establish which of those it can actually reach within a day or two and which are restricted.
Restrictions are the part most people underestimate. Cash held as a deposit against a lease, trapped in a subsidiary that cannot pay a dividend, or sitting in a country with exchange controls all appears on the balance sheet as cash while being unavailable for paying next week's suppliers.
The second half of the analysis is the claims side: overdrafts drawn, invoice finance advanced, and any debt due within the next twelve months. Netting these off gives the net cash or net debt position, which is the figure lenders and analysts quote.
Adding undrawn committed facilities converts the picture into total available liquidity, which is what actually determines survival. A company with $200,000 of cash and a $3,000,000 undrawn revolving facility is in a much stronger position than one with $1,000,000 of cash and nothing else.
The final step is usually to convert liquidity into time by dividing by the monthly net cash burn, producing a runway in months. That single number does more to focus a management meeting than any table of balances.
In practice
Real-world examples.
Example
A veterinary group with eleven practices holds cash in eleven separate accounts. Weekly cash position analysis shows $600,000 idle across the network while head office pays overdraft interest, prompting a sweep arrangement that pools balances every night.
Example
A biotechnology firm reports $18,000,000 of cash to its board but the analysis flags $4,000,000 pledged as security for a lab lease. The usable figure of $14,000,000 changes the runway from 24 months to 19 and brings the next funding round forward.
Example
An exporter finds that 40% of its cash sits in an overseas subsidiary where repatriating funds triggers a withholding charge. The analysis presents domestic and overseas liquidity separately so nobody assumes the full balance is available for a domestic acquisition.
Think of it
“Cash position analysis is understanding your current cash situation-what you have and what's coming.
Formula
Calculation
Net cash position = cash and cash equivalents - overdrafts and short term debt, and total available liquidity = net cash position + undrawn committed facilities
A design agency holds $1,250,000 across its current accounts and $400,000 in a seven day money market deposit, and has drawn $150,000 on its overdraft. Net cash position = $1,250,000 + $400,000 - $150,000 = $1,500,000.
It also has an undrawn revolving facility of $750,000, so total available liquidity = $1,500,000 + $750,000 = $2,250,000.
Monthly receipts average $900,000 against outflows of $1,150,000, giving a net burn of $250,000 a month. Runway = $2,250,000 / $250,000 = 9 months. If $300,000 of the current account balance is a client retainer held on trust and therefore unavailable, usable liquidity falls to $1,950,000 and the runway shortens to $1,950,000 / $250,000 = 7.8 months.Case study
Seen in the real world.
The following is an illustrative and entirely fictional case. Merrow Fields Hospitality, an invented operator of eight countryside inns, reported group cash of $2,600,000 each month and its directors felt comfortable. The number came from adding every bank balance on the last day of the month, which happened to fall after weekend takings had cleared but before the monthly supplier run.
A new finance director introduced a proper cash position analysis on the fictional group. Netting off the $700,000 overdraft at two sites, removing $250,000 of customer deposits for future weddings and excluding a $180,000 rent deposit reduced usable cash to $1,470,000, and the mid month low point was closer to $900,000.
Merrow Fields did not lose a penny in the exercise, but its decision making changed. The board deferred a planned $600,000 refurbishment by one quarter, arranged a $500,000 committed facility as a buffer, and started reviewing the position weekly rather than at month end.
Watch out
Common mistakes.
- Reading the month end bank balance as the cash position, when month end is usually the most flattering day of the month and hides the mid month low point.
- Counting customer deposits, staff pension contributions and unpaid sales tax as available cash, when all three are other people's money passing through the account.
- Ignoring undrawn facilities entirely, which understates real liquidity and can push a board into raising expensive emergency funding it did not need.
Questions
People also ask.
How often should the analysis be done?
Weekly is normal for most trading businesses, moving to daily when liquidity is tight or a covenant test is approaching.
What is the difference between cash position and cash flow?
The position is a snapshot of what you hold at a point in time, while cash flow describes the movement between two such snapshots.
Does a strong cash position always mean a healthy business?
No, because cash can be strong simply because suppliers have not yet been paid or a large tax bill is looming, which is why the analysis pairs the balance with committed near term outflows.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%