Liquidity management is the lifeline of every company. However, not all "Cash positionCash position" are the same - depending on how you define them, you will make different decisions, take different risks and have to deal with different levels of complexity in determining them.
In this article you will find out:
- Which levels of definition of Cash position exist,
- How the risk profiles differ,
- How these definitions relate to the classic 1st, 2nd and 3rd degreeCash position are to be distinguished,
- Which complexity you will face during the investigation,
- And which recommendations for action result from this.
The three levels of definition of Cash position
1. cash (narrow definition)
Definition: Only the actual account balances on bank accounts + cash on hand.
Example: Bank balances, cash in hand.
Important: No receivables or other current assets included.
2. net cash fund
Definition: Cash and cash equivalents plus very short-term receivables minus current liabilities.
Typical ingredients:
Cash and cash equivalents
+ current receivables (e.g. customer receivables that are due very soon)
- Current liabilities (e.g. outstanding supplier invoices)
Objective: To show what is available in terms of available funds when amounts flowing in and out are taken into account.
Formula:
Net cash fund = cash and cash equivalents + current receivables - current liabilities
3. net working capital
Here even broader thinking:
Cash and cash equivalents
+ current assets (receivables, inventories, etc.)
- Current liabilities (suppliers, short-term loans, etc.)
Effective: You calculate the total working capital (current assets minus current liabilities).
Formula:
Net working capital ≈ Cash and cash equivalents + current receivables - current liabilities + inventories (defined as very short-term)
Summary:
Term | Scope | Remark |
Cash | Bank + cash only | Extremely liquid |
Net cash fund | Cash + receivables - liabilities | Available at short notice |
Net working capital | Net cash fund + other current assets (e.g. inventories) | even broader, more liquidity perspective on working capital |
Why these distinctions are important
- Reporting: Depending on the addressee and purpose (e.g. investors, banks), different definitions of Cash position are required.
- Crisis scenarios: In stress situations, the "real" available cash is often of interest - in this case, the narrow definition.
- Planning: For rolling cash flow planning (e.g. for COMMITLY), it makes sense to include receivables and payables (= open items).
Risk profiles of the definitions
These different cash definitions have different risk profilesbecause they relate to how secure you can access these funds can access these funds.
Here is a structured overview of the risk classification:
1. cash (only account balances and cash)
- Risk: Very low
- Reason: Immediately available. No uncertainty. No risk of default.
- Typical risk:
- Bank risk (e.g. insolvency of a bank → usually limited by deposit protection)
- Currency risk (for foreign currency accounts)
2. net cash fund (cash + receivables - liabilities)
- Risk: Medium
- Reason: Receivables could not or later be paid; liabilities may arise earlier due earlier than planned.
- Typical risks:
- Bad debt risk: Customers pay late or not at all.
- Receivables quality risk: Receivables may exist, but are difficult to collect (e.g. in crises).
- Liabilities: Suppliers or banks demand short-term payments more quickly (liquidity bottleneck).
- Addition: Receivables ≠ Cash → "Near cash" with uncertainties.
3. net working capital (cash + receivables - liabilities + inventories)
- Risk: High
- Reason: Includes items such as inventoriesthat cannot be liquidated immediately in an emergency or only at a discount.
- Typical risks:
- Inventory valuation: Stocks lose value (obsolescence, spoilage, market price collapse).
- Liquidation risk: Inventories may have to be sold below value.
- Timing risk: Selling takes time, but liquidity needs are immediate.
Summarized as a risk scale
Definition | Availability risk | Typical risks |
Cash | Very low | Banking risk, currency risk |
Net cash fund | Medium | Bad debts, early repayment of liabilities |
Net working capital | High | Stock devaluations, liquidation delays |
The broader the definition, the greater the uncertainty as to whether the funds are really available quickly.
Practical tip
- For liquidity management: Always look first at cash and net cash fund first.
- For company valuation or crisis scenarios: Net working capital It is better not to show net working capital as available in the short term because of the high level of uncertainty.
Differentiation from 1st, 2nd and 3rd degree Cash position
The liquidity of the different grades are classic key figures for liquidity analysis of a company, especially in balance sheet analysis.
Here are the definitions:
Liquidity ratio | Formula | Meaning | Target value |
1st degreeCash position (cash liquidity) | Cash and cash equivalents ÷ current liabilities × 100 | Can the company settle its short-term debts with cash/bank balances only? | 20-30% |
2nd degreeCash position (collection-related Cash position) | (Cash and cash equivalents + current receivables) ÷ current liabilities × 100 | Can current liabilities be offset against cash and cash equivalents and receivables due in the near future? | 100% |
3rd degreeCash position (sales-related Cash position) | (Cash and cash equivalents + current receivables + inventories) ÷ current liabilities × 100 | Can current liabilities be covered by all current assets? | 120-200% |
Comparison with the "Cash Fund" definitions:
Term | German equivalent | Differences |
Cash (account balances only) | Cash position 1st degree | Almost identical |
Net cash fund (Cash + receivables - liabilities) | Similar to 2nd degree Cash position | But net view (balance), not just ratio |
Net working capital (incl. inventories) | Cash position 3rd degree | Similar scope, but you often look at absolute means instead of just relation to debt |
The decisive difference:
- Cash position 1-3 are ratios (ratios, percentages), they measure "coverage ratios" in relation to current liabilities.
- The funds (cash fund / net cash fund) are rather absolute amountsHow much liquid assets do you actually have available?
Short:
- Cash position 1/2/3 = Ratios (in %)
- Cash Fund / Net Cash Fund = Amounts (€)
Attention: The classic liquidity ratios measure ratios (percentages), while the fund definitions consider absolute amounts.
Complexity in the investigation
The further you move away from Cash the more more complex and more uncertain the determination becomes. Here is a structured comparisonthat addresses precisely this point:
Comparison: Complexity of the investigation
Criterion | Cash | Net cash fund | Net working capital |
Determination | Very simple: Bank and cash balances directly from bank statements / accounting | Funds: Cash and cash equivalents + receivables - liabilities → requires evaluation of open items (debtors, creditors) | High: Additional valuation of inventories/other current assets necessary |
Data sources | Bank entries, cash book | Accounts receivable accounting, accounts payable accounting, payment target analyses | Accounts receivable/accounts payable + stock valuationInventories or stock deductions, if applicable |
Update frequency required | High (daily/several times a week makes sense) | Medium (weekly/monthly) | Low to medium (monthly or quarterly usual) |
Scope for valuation | No leeway (balances are fixed) | Scope for estimating when receivables/liabilities will fall due | Significant scope for inventory valuation (e.g. depreciation, market prices) |
Risk of errors | Low | Funds (receivables may be incorrectly valued or overlooked) | High (inventories may be set too optimistically) |
Cost of the investigation | Low | Medium | High |
IT/system requirements | Low (bank connection, account statements) | Resources (open items, due date analyses, ERP interfaces) | High (inventory management, accounting specifications, manual post-processing if necessary) |
The more components are included, the more complex and uncertain the calculation of liquidity becomes.
Summary of the definition levels Cash position
Definition of Cash position = cash or cash equivalents:
- Simple
- Very reliable
- Low susceptibility to errors
Definition of Cash position = net cash fund (plus receivables and liabilities):
- Requires accounting data and due date analyses
- Risk due to payment defaults or earlier claims of liabilities
Definition of Cash position = net working capital (plus inventories):
- Complex (valuation of inventories)
- Significantly higher uncertainties in actual availability
- High effort and scope for interpretation
Recommendations and tips
- Operational cash management: Work with the narrowest definition (cash) for day-to-day operations.
- Forecasting: Use the net cash fund (including receivables and liabilities) for short to medium-term planning.
- Strategic analyses: Only use net working capital for longer-term or balance sheet valuations, but not for short-term liquidity decisions.
- Ensure data quality: For net cash fund and net working capital, up-to-date and correct accounting data is essential.
- Create transparency: Communicate clearly which definition you use - internally and externally. Different expectations can otherwise lead to serious misunderstandings.
Choosing the right liquidity definition is not a purely technical issue - it determines the security, speed and accuracy of your financial decisions. If you do not correctly assess the risk and complexity, you run the risk of overlooking liquidity bottlenecks or getting lost in time-consuming, error-prone calculations.
A final tip: Always start with "cash" and only expand your analysis if the information gain justifies the increased complexity.
