What is the cash position?

The cash position refers to the total amount of liquid assets a company currently holds, including available cash and short-term deposits. 

It offers a snapshot of the company’s ability to meet its immediate financial obligations. In short, the cash position provides a real-time view of the company’s financial health and liquidity.

The significance of cash position

A robust cash position is essential for smooth business operations. It ensures you can cover salaries, rent, bills, and unexpected expenses without resorting to external financing. In contrast, a weak cash position can lead to liquidity shortages, threatening your business stability.

The definition of a company’s cash position varies widely based on business model, market conditions, and financial objectives. A practical guideline is to maintain just enough cash to meet your needs but no more.

Consistent monitoring of your cash position enhances financial planning accuracy and guarantees that funds are always available to sustain uninterrupted operations.

For example, re:cap Insights offers a software tool that provides a comprehensive view of all your bank accounts and balances in one place, delivering a quick and snapshot of your cash position.

Cash position: a practical example

Let's look at a tech company, "SaaS Ltd.," to illustrate the importance of cash positioning. SaaS Ltd. has fixed monthly costs of €500,000, which cover salaries, rent, and other operational expenses. The company’s current cash position is at €800,000.

Day 1: Revenue

A customer settles an outstanding invoice of €300,000, boosting the cash position to €1.1 million. With this amount, SaaS Ltd. can comfortably cover its expenses for the next two months without external funding, even if no new revenue comes in.

Day 10: Unexpected expenses

An unforeseen tax payment of €200,000 reduces the cash position to €900,000.

Day 25: Salaries and wages

At the end of the month, SaaS Ltd. disburses €400,000 for salaries and wages. This leaves the company with €500,000. While this cash position covers the company's expenses for another month, it's clear that generating additional revenue is crucial to maintaining liquidity in the future.

This example highlights the critical need for vigilant cash flow management. Even a single unplanned expense can significantly affect liquidity. To safeguard financial stability, companies should implement robust cash flow analysis, cash flow monitoring and forecasting strategies. Other than that: read our article on how to protect your cash balance with re:cap funding.

Composition of cash position

A company's cash position includes all liquid assets readily available to meet its obligations. In detail, the cash position contains the following elements:

1. Cash

Plain and simple: cash covers all the company's physical cash, including what's in registers, safes, and petty cash funds.

2. Bank balances

• Current accounts: these are the funds in checking accounts that are readily available for immediate use. They form the backbone of your cash position, primarily used for daily transactions.
• Overnight deposits: these are short-term deposits that can be accessed instantly, making them an essential part of your cash position.

3. Short-term investments

• Term deposits: funds locked in for a short duration, ranging from one day to a few months. Depending on the type, they can be quickly liquidated if needed.
• Money market funds: these invest in highly liquid, short-term instruments like treasury bills, commercial papers, or short-term bonds, offering swift access to your capital.
• Deposits with other financial institutions: companies may hold deposits with other banks. While not always available daily, these can be liquidated at short notice.

4. Checks and Payment Advice

Uncashed checks and initiated payments awaiting credit are included in the cash position.

5. Receivables from short-term funding

Short-term loans with assured repayment can be considered part of the cash position. 

The cash position typically comprises a mix of these components. The finance team actively manages them to ensure enough liquid assets are available to meet short-term obligations and optimize the use of funds.

The makeup of the cash position varies based on the company’s operations and liquidity strategy. Companies in stable, low-risk environments may allocate more to short-term investments, while those in volatile or seasonal markets may prioritize immediate access to cash.

Conclusion: cash position

Your cash position is more than just a number – it's the lifeblood of your business. That’s why cash positioning and cash flow planning is essential to a company’s stability.

By consistently monitoring and actively managing your cash, you safeguard your financial health and equip your business to navigate macroeconomic challenges with confidence. A robust cash position isn't just important, it's critical to your company’s long-term success.