You calculate net cash balance by subtracting current liabilities from your cash balance.
Here's a breakdown:
- Net Cash Balance = Cash Balance - Current Liabilities
Let's delve into the components of this formula:
- Cash Balance: This includes all the cash a company holds, along with highly liquid assets easily convertible to cash. Think of it as readily available funds. Examples include:
- Cash on hand
- Checking accounts
- Money market funds
- Short-term, highly liquid investments
- Current Liabilities: These are financial obligations due within one year or one operating cycle (whichever is longer). Examples include:
- Accounts payable
- Salaries payable
- Short-term loans
- Accrued expenses
- Current portion of long-term debt
Example:
Imagine a company with a cash balance of $100,000 and current liabilities of $30,000.
Net Cash Balance = $100,000 (Cash Balance) - $30,000 (Current Liabilities) = $70,000
In this case, the company's net cash balance is $70,000.
In summary, the net cash balance provides a snapshot of a company's immediate liquidity by showing the cash available after covering its short-term obligations.
