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Cash position - everything on the topic

Cash position - everything on the topic

Summary

The term Cash position can be found in both business administration and economics. 

  • From a business perspective, a company with sufficient Cash position is in a position to meet all payment obligations in full at all times when they fall due. 
  • In economics, the two sub-disciplines of microeconomics and macroeconomics use the term Cash position. 
    • In microeconomics, this refers to the possibility of converting fixed assets into money. 
    • In macroeconomics, Cash position refers to a certain amount of money available in a country's economy. 
  • In capital market theory, there is also the term market liquidity, which indicates the quantity of goods or number of capital contracts that can be traded on the market at any time without the market price being noticeably changed by a single transaction. 

In any case, Cash position is an important indicator of the solvency of companies and countries.

 

Cash position in the company

 

Every company regularly incurs costs and other payment obligations. These include wages and salaries, social security contributions, rent, taxes, insurance premiums as well as instalments and interest on loans. Supplier invoices, expenses for repairs and maintenance as well as expenses for the marketing budget or for new vehicles and machines also have to be paid. 

For each cost type, there is a specific due date by which payment must be made. Suppliers, service providers and other vendors either insist on immediate payment or grant a payment term. Salary payments must be made monthly. Loan installments, taxes and insurance premiums are paid monthly or at certain intervals, such as quarterly, semi-annually or once a year. This means high expenses on certain dates, which must be taken into account accordingly in Cash flow planning .

The task of the business administration department of a company is to provide sufficient liquid funds at the respective due dates. The funds must be sufficient to meet all payment obligations in full on time. 

To do this, the business economist calculates three liquidity ratios. The calculated figures show whether the company's Cash position is sufficient or whether liquidity assistance needs to be drawn on in good time.

How a company's Cash position is measured

 

The aim of successful business management is to achieve the optimum Cash position . This means that there must not be too much credit on the current account, which only causes costs and does not generate any income. At the same time, the business account must be sufficiently covered on the due dates of the various payment obligations so that no overdraft interest is incurred. 

In addition, the available capital should be in a healthy ratio to the company's debts. In order to take all these components into account, the three degrees of liquidity represent one of the most important liquidity aids of a company.

Cash position 1st degree

 

First of all, the most important components of Cash position 1st degree:

  • Other designations: Cash ratio or cash liquidity
  • Formula for calculation: Cash and cash equivalents : Current liabilities x 100 [%].
  • Recommended value: 10 % - 30 %

The liquid assets of a company are not only the credit balance on the business account or on the accounts at other banks and the Deutsche Bundesbank. Cash on hand, cheques and discountable bills of exchange also count as liquid assets. Liquid funds are characterised by the fact that they are available immediately and without restrictions for the settlement of invoices.

Current liabilities include loans or supplier credits with a remaining term of less than one year. Current liabilities also include provisions for taxes, employee bonuses, repairs, new purchases or other purposes. The recommended value of Cash position 1st degree is so low because a company can also use inventories and receivables to settle current liabilities.

Cash position 2nd degree

 

Here are the most important facts about Cash position 2nd degree:

  • Other names: Acid test, quick ratio or draw-in conditioned Cash position
  • Formula for calculation: (cash and cash equivalents + current receivables) : current liabilities x 100 [%].
  • Recommended value: 100 % - 120 %

Short-term receivables are also included in Cash position 2nd degree. These are receivables from debtors with a payment term of less than one year. If the calculation of Cash position 2nd degree results in a value of less than 100%, the result indicates that the current liabilities cannot be paid with liquid funds available at short notice. The management must intervene here and identify the causes or take countermeasures. 

The Acid Test is also called the ratio because banks use it to assess creditworthiness. The Bankersrule states that the value should be above 100%. 

Cash position 3rd degree

 

To begin with, the most important components of Cash position 3rd degree:

  • Other designations: Current ratio or sales-related Cash position
  • Formula for calculation: (cash and cash equivalents + current receivables + inventories) : current liabilities x 100 [%].
  • Recommended value: 120 % - 200 %

In addition to the factors known from the first two degrees of liquidity, the company's inventories also play a role in the calculation of Cash position 3rd degree. These are the inventories shown in the balance sheet, i.e. raw materials, auxiliary materials, operating materials, work in progress and finished goods that have not yet been sold. Advance payments for the required materials are also included in inventories.

A Cash position 3rd degree of less than 120 % is an indicator that the total Cash position tied up in current assets is not sufficient to pay the current liabilities. A result of more than 200 %, on the other hand, can be an indication that there are too many raw materials or merchandise in the warehouse and that these are tying up too much Cash position . This Cash position is not enough to cover running costs or repay current liabilities, which can lead to a liquidity bottleneck.

Cash position in the national economy

 

It is not only companies that have to regularly calculate their liquidity ratios and check their solvency. The term Cash position can also be found in the economic news in connection with the national and international monetary policy of individual countries. Each state pursues its own monetary policy goals to strengthen the country's economy. By controlling the amount of money in circulation, a state can influence interest rates, prices and the demand for goods and services, for example. The money supply in Europe is controlled by the countries' central banks in coordination and agreement with the European Central Bank (ECB).

Throughout Europe, all governments and central banks work towards the goal of ensuring price stability in the individual countries through a balanced monetary policy. Germany's national monetary policy is determined by the Federal Government and the Deutsche Bundesbank in Frankfurt am Main. The Bundesbank regularly calculates the money supply available to the economy as a whole. A change in the money supply has a direct impact on the price development, inflation and economic growth of a state.

The money supply is controlled by the key interest rate, which the German Bundesbank or the ECB can lower or raise accordingly. To make it easier to determine whether an adjustment of the key interest rate is necessary, the central banks divide the money supply into M0, M1, M2 and M3. Each central bank has its own definition of the individual quantities of money. However, the banks agree that it is only the money that is in the possession of private individuals, companies and other so-called non-banks.

Here is the breakdown of the European Central Bank's (ECB) money supply:

  • Money supply M0: Cash in the cash registers and ATMs of credit institutions as well as customer deposits held by banks and savings banks at the central bank of their country
  • Money supply M1: Cash and balances on current accounts of consumers and businesses
  • M2 money supply: M1 money supply plus credit balances in call money accounts or savings books with a statutory period of notice of up to three months plus time deposits or other forms of investment with a term of up to two years.
  • Money stock M3: Money stock M2 plus shares in bank debt securities, money market funds and other money market instruments as well as repurchase agreements with a maturity of up to two years.

Relationship between economic and business management Cash position

An important task of central banks is particularly evident in times of crisis. For example, the ECB has decided to make additional Cash position available due to the global coronavirus crisis. But how is the ECB increasing Cash position in Europe and what does this mean for entrepreneurs? How does this political measure help to survive the crisis and ensure the continued existence of the company?

The answer to these questions is that the ECB and the individual central banks must ensure that businesses are optimally supplied with financial resources. To this end, businesses must be provided with low-interest loans and subsidies as well as other aid.

Corona aid activities in Europe

 

The European Council has already adopted a number of aid measures with which the European states can increase their Cash position and support companies:

  • European Short-Time Workers' Allowance and Support Scheme (SURE)
  • Business loans for small and medium-sized enterprises (SMEs) through a guarantee fund of the European Investment Bank
  • Loans from the European Stability Mechanism (ESM) with low conditionality
  • EU Reconstruction Fund

In addition to pan-European aid, individual countries also offer liquidity support for companies of all sizes. 

 

Overview of aid in Germany

 

In Germany, various measures have been adopted that are handled by the Kreditanstalt für Wiederaufbau (KfW):

  • Quick loan for companies with more than ten employees
  • Special business loans for young and long-standing businesses
  • Syndicated financing from 25 million euros

In addition to low-interest loans from KfW, entrepreneurs can also receive help from the federal and state governments. This includes grants and emergency aid, short-time working allowance, loan guarantees and the interest-free deferral of tax payments or social security contributions. For SMEs, the self-employed and freelancers, the federal and state governments are providing unbureaucratic emergency aid that does not have to be repaid. In addition, VAT will be reduced by three percent for six months as a further measure to boost Cash position .

Overview Aid in Austria

 

In Austria, too, businesses receive extensive support from the state. A Corona assistance fund has been set up to provide targeted support to established companies of all sizes as well as start-ups, new self-employed persons, freelancers, micro-entrepreneurs and one-person enterprises (EPU). The most important assistance in Austria includes:

  • Working capital financing
  • Bridging finance for tourism businesses
  • Simplified transfer of employees to another enterprise
  • Tax deferral or payment by instalments of taxes
  • Short-time allowance
  • Guarantees and liabilities to secure loans

Cash position as a decisive factor for the economy as a whole

A sufficient Cash position ensures that a company can meet its payment obligations and continue to operate on the market. In the national economy, Cash position depends on the supply of sufficient money to the economy as a whole. Therefore, one of the most important tasks of monetary policy is to ensure the optimal Cash position and thus the economic stability of a state. 

This is particularly evident in times of crisis, when the government must take targeted measures to ensure sufficient Cash position .

 

Credits: Photo from unsplash, by Markus Spiske