Definition of Cash Position
Cash position is a metric that’s designed to show how much money a company has access to at any given time. Different people have different ways of measuring cash position, with purists only measuring the money that they have access to and others also including any liquid assets that the company can get hold of.
How do Investors Calculate Cash Position?
Investors typically measure their cash position by calculating how much of their portfolio consists of either cash or cash equivalents.
Who Needs to Know Cash Position?
Due to the fact that cash position can provide a useful metric to determine how much money a company has when compared to its expenses and liabilities, it’s often a focus point for finance teams, CFOs and CEOs who want to understand how the company’s financials are performing.
Cash position is also a useful metric for stock market analysts and potential investors, because they can use the company’s quarterly cash flow statements to calculate its cash position. If a company is unable to cover its liabilities with the cash and liquid assets that it has access to, it sets alarm bells ringing.
Are There Any Downsides to a Large Cash Position?
Having a large cash position can be useful because there’s no risk involved and no chance that the company could lose the money, which is the case if it’s converted to investments. It also provides the company with a safety mechanism that they can turn to if they’re negatively affected by unforeseen circumstances or they need access to capital to purchase equipment or make other investments.
Because of this, most people see it as a good thing when a company’s cash position is a lot higher than their liabilities. However, some people also see it as a problem, because it could indicate that the company is failing to invest in new projects.
What is a Liquidity Ratio?
To calculate an organization’s liquidity ratio, you take its current assets and divide that figure by their liabilities. The final number is the company’s liquidity ratio, and the goal is to have a ratio of more than one, because that means that they have what they need to stay in business.
What Else Do I Need to Know About Cash Position?
Banks and investment companies often need to pay particularly close attention to their cash position. That’s because they need to be able to pay all of their account holders if they cash in their assets and call in their funds.
For example, if a bank has 1,000 account holders who all have $10 in their account, they need to maintain a cash position of at least $10,000 to make sure that they can pay out if everyone simultaneously decides to empty their account.