Jordan,
I agree doing this calculation on more than a monthly basis is not practical and potentially misleading given that having a good over and under billing numbers and a good estimate of income taxes are critical in answering this question.
Another way of looking at this question is "How much cash can I take out of the business without causing significant operating problems?" The answer to this is in your debt to equity ratio. The most conservative view of this would be a debt to equity ratio of 1:1. So, for example, if you're current liabilities are $500 and your current equity is $750. You could accrue a distribution to the owners of $125 to get to a debt to equity ratio of 1:1. Of course this is very conservative and assumes that your cash balance is greater than $125.. Many banks will allow a company to have a debt to equity ratio of 1.5:1 or even 2:1. In any event, I wouldn't accrue over what it would take to zero out your working capital.
Remember to look at any debt covenants you might have that might affect this.
Best wishes,
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Joseph Gravenstine CPA
Controller
National Glass and Metal Co., Inc.
Philadelphia PA
(215) 938-8880
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Original Message:
Sent: 07-23-2019 14:30
From: Jordan Davidson
Subject: Determining How Much Cash is "Ours"
CFMA Group,
The owner has asked me several times "How much of the cash in our cash account is "ours", and to date, I've not been able to provide him with a clear enough answer.
I know that some of the cash we have is because we are over-billed on our projects, some of the cash is in our account because our owners are "quick paying" our bills to them, while we are net 30 on our subs and vendors. I also know that some of the cash on hand is because we are holding a higher retention rate on our subcontracts than what our owners are holding on us.
All this being said, I know that our Net Income is not all in cash, I know that our "equity" is not all in cash and I know that our working capital is elevated because of the over-billed status on our projects.
How can I provide a better and clearer answer? Any help would be appreciated.
Thanks!
Jordan Davidson
Accounting Manager
1033 Lafayette Ave
Terre Haute, IN 47804
812-235-6757 Fax