How much of a company's cash is actually available?
Five readings of the same balance, all defensible, and each one belongs to somebody different. The mistake is never the arithmetic; it is using one reading to answer another reading's question.
The accounts say 214,000,000.00. The account the company actually pays
from holds 68,400,000.00. Both are right, and between them sit three more
figures that are also right. The distance is 145,600,000.00, which is
68.0374 per cent of the number the board will be shown.
The five readings
Start at the top and take things away. Each subtraction is a different kind of fact: a legal
one, a geographic one, a policy one, a timing one.
Reading
What is taken out
Who means this by “cash”
Amount
1. Reported
nothing
the accounts, the auditor, the board deck
214,000,000.00
2. Unrestricted
9,000,000.00 pledged as collateral or held in escrow
the notes to the accounts
205,000,000.00
3. Accessible
53,000,000.00 behind exchange controls, a withholding tax or a partner's consent
the facility agreement
152,000,000.00
4. Available
31,392,000.00 of operating float — 6 business days of the company's own payments
the treasurer
120,608,000.00
5. Same-day
52,208,000.00 not yet transferred, in other time zones or value-dated tomorrow
whoever pays the invoice at noon
68,400,000.00
Same company, same morning. The readings nest: each is contained in the one above it.
The four subtractions are not of one kind, and it is worth being exact about that.
The 9,000,000.00 is a legal fact: somebody else has a claim on it. The
53,000,000.00 is geographic: it is in the wrong place and the border has a toll on it. The
31,392,000.00 is a policy choice, and the company could choose differently. The rest is
timing, and it is the only one of the four that cures itself overnight.
The float is a choice, so sensitise it
The company holds 6 business days of disbursements back. Disbursements
run at 5,232,000.00 a day, so the float is 31,392,000.00. Move the policy
and reading 4 moves with it.
Days of float
Operating float
Available cash
4
20,928,000.00
131,072,000.00
6
31,392,000.00
120,608,000.00
8
41,856,000.00
110,144,000.00
A policy number that is not sensitised is a number somebody liked.
Where it shows up: net debt, three ways
The reading is not an accounting curiosity. Net the three different figures against the same
550,000,000.00 of gross debt and the leverage ratio moves by more than half a turn.
Cash netted
Net debt
Leverage
Headroom under 3.0000×
Reported cash — the board deck
336,000,000.00
2.0000×
1.0000
Accessible cash — the facility agreement
398,000,000.00
2.3690×
0.6310
Available cash — the treasurer
429,392,000.00
2.5559×
0.4441
Board to treasurer
0.5559 turns
The cash definition alone — the trapped and restricted cash the agreement does not net — is worth 0.3690 turns.
What makes cash trapped
Trapped is a category, not a country. The test used here is operational: it cannot be brought to
the group's concentration account within five business days without a cost or a third party's
consent. On this balance sheet that is 53,000,000.00 — 47,000,000.00 behind
exchange controls, approval queues and a withholding tax on dividends, and 6,000,000.00 that
is a joint-venture partner's half and simply is not the group's to move.
The habit
Name the reading. “We have 214,000,000 of cash” is true and uninformative.
“Reported 214,000,000; accessible under the facility 152,000,000;
available 120,608,000; in the account this morning 68,400,000” is four
sentences, each of which can be checked and each of which can be acted on. The cost of not naming
it shows up in the gaps: reported to accessible is 62,000,000.00,
and that is the gap a lender finds if the board's number reaches a covenant certificate.
The workbook behind this article
Every figure above is a live formula in the companion files for
Treasury Management — the five readings of cash, the liquidity
test, working capital and the discount, and the hedging book. Each file ends with a Checks
sheet setting the printed figure beside the computed one. They are free, and they need no
account and no email address.
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