Definition at a glance

How do you calculate Cash position? Before we go into more detail on calculation and planning, we would first like to describe the definition in more detail. This differs slightly depending on the financial sector, even if the basis is basically the same.

The term Cash position is used in both business and economics:

• From a business point of view 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 the National economy the two sub-areas of microeconomics and macroeconomics use this term.
  • 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 the capital market theory market liquidity refers to the quantity of goods or capital contracts that can be traded at any time without a single transaction having a noticeable effect on the market price.

Regardless of the context, it is important to Cash position to calculateas it 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 installments 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 must also 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 that high expenses are incurred on certain dates, which are included in the planning and calculation of the Cash position must be taken into account accordingly.

The business administration department of a company has the task of ensuring that sufficient liquid funds are available on the respective due dates in order to meet all payment obligations on time and in full.

To do this, the business economist must liquidity ratioswhich show whether the company's liquid funds are sufficient or whether measures need to be taken in good time to ensure solvency.

Cash position Calculating in companies - how it works

The goal of successful corporate management is to ensure optimal financial flexibility. This means that there should not be too much credit in the business account, as this incurs costs and does not generate a return. At the same time, it must be sufficiently covered on the due dates of payment obligations in order to avoid overdraft interest.

In addition, the available capital should be in a healthy relationship to the company's debts. In order to take all these aspects into account, each individual liquidity ratio is an important tool for managing a company's financial flexibility.

The calculation of Cash position (liquidity ratios) - formulas upon formulas 

Regardless of whether a business economist or other financial officer calculates the calculate cash liquidity or a higher degree of liquidity - the formula and the underlying data are the essential starting point. Many people shy away from complicated calculation rules and algorithms, but the basics are often quicker and easier to understand than you might think. We would like to explain these in more detail below.

Cash position 1st degree

Formula and definition to calculate the direct, conservative Cash position :

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

A company's liquid assets are not only the credit balance in the business account or in accounts with other banks and the German Bundesbank. Cash on hand, cheques and discountable bills of exchange are also included. Liquid funds are characterized by the fact that they are available immediately and without restriction for the settlement of invoices.

Current liabilities include loans or supplier credits with a remaining term of less than one year. Provisions for taxes, bonus payments to employees, repairs, new purchases or other purposes are also included in current liabilities. A company can also use inventories and receivables to settle payments that are due soon. When companies calculate the calculate the first degree of Cash position the recommended value is set accordingly low.

Cash position 2nd degree

Formula and definition to calculate the to calculate the intake-related Cash position :

• Other designations: Acid Test, Quick Ratio or due to intake
• Formula for calculation: (cash and cash equivalents + current receivables) : current liabilities x 100 [%].
• Recommended value: 100 % - 120 %

To calculate the calculate the second degree of Cash position short-term receivables are also taken into account. These relate to payment claims against debtors with a payment term of less than one year. A value below 100% in this calculation indicates that the current liabilities are not fully covered by readily available cash and cash equivalents. In such a case, the company management must intervene, identify the causes and initiate countermeasures if necessary.

The key figure is also known as acid test as banks use it to assess creditworthiness. The so-called "banker's rule" states that the value above 100 % should be above 100 %.

Cash position 3rd degree

Formula and definition to calculate the to calculate the sales-related Cash position

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

To calculate the calculate the third degree of Cash position the company's inventories must be included in addition to the factors already taken into account in the first two degrees of liquidity. These are the stocks of raw materials, auxiliary materials, operating materials, work in progress and finished goods that have been produced but not yet sold that are shown in the balance sheet. Advance payments for materials required are also included in inventories.

A value of less than 120 % indicates that the total capital tied up in current assets is not sufficient to fully cover current liabilities. A result of over 200 % on the other hand, may indicate that the company has too many raw materials or merchandise in stock, tying up an excessive amount of capital. This tied up Cash position is then not available to cover running costs or repay current liabilities, which ultimately leads to a financial bottleneck. financial bottleneck can lead to a financial bottleneck.

Cash position Calculating in the national economy - effects on the national budget

Not only companies have to regularly calculate their calculate their liquidity ratios and check their solvency. The term Cash position also frequently appears in the economic news in connection with national and international monetary policy. Each state pursues its own monetary policy goals in order 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. In Europe, this regulation is carried out by the national central banks in close coordination and agreement with the European Central Bank (ECB) is responsible for this.

Across Europe, governments and central banks are working to ensure price stability through a balanced monetary and financial policy. price stability in the individual countries. In Germany, these measures are determined by the federal government and the Deutsche Bundesbank in Frankfurt am Main. The Bundesbank regularly determines how much money is in circulation and available to the economy. Changes in this money circulation have a direct impact on price trends, inflation and the country's economic growth. In order to fully understand and anticipate these consequences, it is also important in the state economy to regularly calculate the Cash position to calculate.

The money supply is controlled by the key interest rate, which the German Bundesbank or the ECB can lower or raise as required. Central banks divide the money supply into the categories M0, M1, M2 and M3 in order to better analyze and decide whether an adjustment of the key interest rate is necessary. Each central bank defines them slightly differently. However, there is a consensus that only money held by private individuals, companies and other so-called non-banks is taken into account.

Here is the breakdown of the money supply according to the European Central Bank (ECB):

• M0Includes cash held 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 respective country.
• M1Consists of cash and current account balances of consumers and companies.
• M2Includes the money supply M1 as well as balances in call money accounts or savings books with a statutory notice period of up to three months and fixed-term deposits or other forms of investment with a term of up to two years.
• M3Includes M2 and additionally shares in bank bonds, money market funds and other money market securities as well as repurchase agreements with a term 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 this in Europe and what does this mean for entrepreneurs? How does this policy 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 companies are optimally supplied with financial resources. To this end, companies must be provided with low-interest loans and subsidies as well as other assistance. By enabling companies to precisely Cash position calculatethey can use the resources more effectively and survive economic challenges.

An exciting look back: Relief measures in the context of Corona in Europe

The European Council had already adopted a number of aid measures with which the European states can secure and support the financial stability of 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 minor conditions
• EU Reconstruction Fund

For the European states, this means calculating their own calculate and adjust their own economic Cash position and adjust them to ensure that sufficient funds are available to implement these programs. In addition to pan-European support, individual countries are also offering specific liquidity assistance to ease the burden on companies of all sizes.

Financial 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 take advantage of support from the federal and state governments. This includes grants, 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, unbureaucratic emergency aid is available that does not have to be repaid.

To optimization of the Cash position the value added tax was also reduced by three percent for six months. These measures require companies to calculate their calculate and monitor their operational Cash position and monitor them in order to accurately assess the impact of the tax relief and aid programs on their financial situation.

Overview of assistance in Austria

Companies in Austria also receive extensive support from the state. A coronavirus aid fund has been set up to help established companies of all sizes as well as start-ups, new self-employed people in the start-up phase and new entrepreneurs. business start-upfreelancers, micro-entrepreneurs and one-person companies (EPU). The most important forms of assistance in Austria include

• 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

Here, too, it is important that companies not only calculate their Cash position and are very precise in doing so, but also use government aid effectively. For example, tax deferrals can directly increase the available Cash position , while bridging finance can improve solvency in times of crisis. solvency in times of crisis secure solvency in times of crisis.

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 remain active on the market. Stability in the economy depends to a large extent on the supply of sufficient money to the economy as a whole. Therefore, one of the most important tasks of monetary policy is to Cash position calculate and control itto ensure the economic stability of a country.

This becomes particularly clear in times of crisis, when the government has to take targeted measures to ensure that the necessary Cash position is available to keep the economy running.

Credits: Photo from unsplash, by Markus Spiske