Ratio: Months Cash on Hand

This ratio tells you whether the organization has sufficient cash resources to deliver its mission and pay its obligations on a timely basis. How long could the bills be paid with no new cash? The basic formula for this ratio is:

Cash on hand ÷ (Total Annual Expenses ÷ 12 months)

Signal:  Positive is better than negative; above 3 is better; upward trend is good; under 3 or downward trend may be cause for concern.

Calculation:  Be clear about what comprises your calculation factors:

• You will need to be clear about what cash is included as “cash on hand.” To be most conservative, you may want to exclude restricted funds or funds set aside by the board as reserve funds. You will certainly want to exclude any endowment funds.
• If non-cash expenses such as in-kind goods and services or depreciation, are significant, you may want to exclude those expenses from the “total annual expenses” amount.

Caveat:  This ratio uses a monthly average and may not be reliable if expenses vary significantly from quarter to quarter.