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Determining How Much Cash is "Ours"

  • 1.  Determining How Much Cash is "Ours"

    Posted 07-23-2019 14:26
    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
    812-232-3700 Office
    812-235-6757 Fax


  • 2.  RE: Determining How Much Cash is "Ours"

    Posted 07-23-2019 17:18
    ​"Our cash" is the cash balance not to exceed retained earnings.

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    Susan Milner
    Corporate Controller
    Eldeco Inc.
    Greenville SC
    (864) 312-9896
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    Original Message


  • 3.  RE: Determining How Much Cash is "Ours"

    Posted 07-24-2019 12:18
    If your owner wants this information on a daily or even a weekly basis, it is not realistic or worth the time investment to produce that number. In addition, since the billing cycle for owner and subcontractor billings is typically monthly instead of daily or weekly, the information would not be accurate. However, assuming that you produce Financial Statements on a monthly basis, then you should compare the Cash Balance on the Balance Sheet to the Amount of Retained Earnings plus Capital Contributions to date. The lower of these two amounts could be considered  "Our Cash". This assumes that you produce GAAP Financials monthly using updated Gross Profit and Percentage Complete calculations.

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    Kerry Sloan CPA, CCIFP
    Consultant
    Hardaway Group, Inc.
    Nashville TN
    (615) 254-5461
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    Original Message


  • 4.  RE: Determining How Much Cash is "Ours"

    Posted 07-24-2019 11:21
    Hello Jordan!  Working capital is really a better way to look at it.  There are too many moving parts associated with cash - and working capital captures all of that as your "net liquid assets".  If your owner is seeking to invest or distribute those "excess" funds, you might want to do some forecasting to make sure you have sufficient funds to support that cash depletion long-term.

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    Reba Stephens CPA
    Director of Finance & Accounting
    Ausland Group
    Grants Pass OR
    (541) 476-3788
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    Original Message


  • 5.  RE: Determining How Much Cash is "Ours"

    Posted 07-25-2019 15:07
    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