What is Cash Positioning and How to Measure Yours? (2024)

16 June, 2023

10 mins

Picture this: Your business is already in a cash deficit situation and needs to borrow to repay debts but cannot do so due to a debt ceiling. You are struggling to find idle cash because you are skimming through multiple spreadsheets. On the other side, your competitor company does not have any bad debts and is seizing lucrative growth opportunities. Want to swap positions with your competitor? Visibility is your key! And, that end-to-end cash flow visibility can be achieved by accurate cash positioning.

According to a survey by Strategic Treasurer, only 70% of enterprises have real-time or daily cash flow visibilityinto their bank accounts. And the rest 30% are visionless into the opportunities and challenges ahead of them. This statistic underscores the critical nature of understanding and measuring your cash position for successful financial management.

Cash positioning can propel organizations to new heights or leave them stagnant in a sea of missed opportunities. As a treasury manager responsible for managing the financial health of your organization, your decisions regarding cash allocation can significantly impact the company’s ability to seize growth opportunities, mitigate risks, and optimize cash resources.

Are you ready to unlock the potential of cash positioning and drive your business forward?

Read on and delve deep into the significance of cash positioning and the tools and techniques to find your current cash position accurately.

What is cash positioning?

Cash positioning is a process of determining a company’s cash position by analyzing actual cash flows from sources like bank statements and external transactions such as interest earnings and maturities.

Meanwhile, cash position refers to a company’s current cash and cash equivalents on a particular day. It represents the actual balance available in the company, including cash in hand and cash held in bank accounts.

Accurate cash positioning enables effective allocation of funds, enhances cash management, and empowers businesses to make informed decisions in optimizing financial stability and profitability.

What is the difference between cash position and cash flow?

Cash position displays the current cash and cash equivalents, whereas cash flow represents cash flow movements from operations, investments, and financing activities over a period. However, both contribute to measuring a company’s financial health.

Example of Cash Position

Here’s an example that lays out the difference between cash flow and cash position.

Let’s say a company named Finan-Z Org had $10,000 in cash at the beginning of the month. During the month, the following transactions occurred:

• Cash inflow: $5,000 (from sales)
• Cash outflow: $4,700 (suppliers, rent, and wages)

Hence, the total cash flow of Finan-Z Org will be: $5,000-$4,700=$300

On the contrary, its cash position will be: $10,000+$5,000-$4,700=$10,300

Understanding the concept of cash positioning lays the foundation for comprehending its significance in financial management. The following section will explore the importance of cash positioning and how it can positively impact an organization’s financial health.

Accurate cash positioning helps treasury managers in the following ways:

1. Paying suppliers on time: Lack of accurate cash positioning can lead to cash flow problems that may lead to missed payments. Accurate cash positioning helps strategically allocate funds, improving payables and preventing penalties.
2. Improving cash management: Companies face difficulties meeting financial obligations that eventually impact day-to-day operations. Accurate cash positioning ensures a clear understanding of cash inflows and outflows, enabling effective cash management.
3. Seizing investment opportunities: With accurate visibility of available funds, organizations may benefit from capitalizing on profitable investments. Understanding cash position enables treasury managers to identify surplus cash and use it for strategic acquisitions or seizing time-sensitive opportunities.
4. Strengthening risk management: Accurate cash positioning allows for maintaining appropriate cash reserves to mitigate potential financial risks, such as market fluctuations, economic downturns, or unexpected expenses.

To sum up, accurate cash positioning helps treasury managers navigate financial challenges to improve working capital management, capitalize on growth opportunities with excess cash, and make confident decisions that drive the long-term success of their organizations.

Now that we understand the vital role of accurate cash positioning, it’s time to explore how treasury managers can effectively measure their cash position. By diving into the techniques and methodologies of cash measurement, you can gain valuable financial insights to drive strategic decision-making. Let’s investigate how to measure cash position and uncover the secrets to understanding your organization’s financial situation.

Traditional Approach to Measuring Cash Position

Companies usually take this approach to find their cash position:

1. Gather the most recent cash position from the cash flow statement, which provides a snapshot of the company’s cash balance.
2. Account for the elapsed time by reviewing the previous cash position and considering any inflows or outflows during the elapsed time.
3. Obtain the bank statements and reconcile them with the company’s records for the corresponding period to ensure accuracy.
4. Calculate inflows and outflows by analyzing the bank statements, sales revenue, OPEX, loan repayments, investments, and other relevant transactions.
5. Determine the current cash position by summing up the inflows and subtracting the outflows from the previous cash position.

The manual approach has several limitations that can affect efficiency and accuracy in finding the cash position. Find the reasons below.

Limitations in Manual Cash Positioning

1. Manual bank statement reconciliation, transaction review, and cash flow calculations can be time-consuming and cause cash positioning delays.
2. Recording numerous transactions causes mistakes in data entry, transposition, or calculation, and causes inaccuracies in the cash positioning.
3. The manual approach provides cash position updates only at specific intervals, such as at the end of the day or on a weekly basis.
4. Spreadsheets have stale data that hinders real-time visibility and makes it difficult to identify patterns, trends, or potential cash flow issues.
5. Consolidating multiple transactions in different currencies across many bank accounts and entities can cause delays in processing and decision-making.

These limitations underscore the need for automated solutions that offer real-time visibility, accuracy, and efficiency in measuring cash position. Mentioned below are the reasons you should consider automating cash positioning.

Automated Cash Position Report

HighRadius’ Cash Management Software provides the following value to treasury managers that helps them get a centralized view of cash position across all banks, geographies, businesses, and currencies.

To summarize, our software gives an accurate view of your cash position and provides customizable cash position worksheets to meet your short-term cash and liquidity requirements.

What determines cash position?

Cash position is analyzed through liquidity ratios, such as the current ratio and quick ratio. These ratios compare a company’s cash and liquid assets to its short-term liabilities, providing insights into its ability to meet immediate obligations and indicating its overall liquidity position.

The current ratio can be found by dividing current assets by current liabilities, while the quick ratio can be calculated by dividing liquid assets (cash, marketable securities, accounts receivable) by current liabilities, and it does not include inventory.

What is a good cash position ratio?

A good cash position ratio typically entails having a current ratio above 1. A current ratio higher than 1 indicates that a company has more current assets than current liabilities, ensuring sufficient liquidity to meet short-term obligations.

What is the difference between cash balance and cash position?

Cash balance represents the tangible cash available in bank accounts, cash registers, or other physical locations to indicate the cash on hand. But, cash position shows the overall liquidity status by considering factors like cash inflows, outflows, pending transactions, and available liquid assets.