All right, let's check out a ratio here, the cash to monthly cash expenses. So this is more of an internal ratio that gets used here to manage our cash at the company. So the cash to monthly cash expenses, it considers this hypothetical situation. If we let's say we stopped receiving cash right now. If all our cash just what we had right now and we needed to continue to operate our business. Well, how long could we operate before we run out of cash and just can't pay for anything anymore? Okay? So this situation, it comes up a lot in healthcare industries. Because when we think about healthcare, well a lot of the money comes from the government, through Medicare payments or through third parties, through insurance companies or something like that. Right? So if you, for some reason, the government, maybe you're supposed to receive most of your income, most of your cash coming from the government through Medicare or Medicaid. Well what if the government all of a sudden said, hey, Medicare payments are going to stop. Whatever it is, the president says no more Medicare. Doesn't matter what it is. Well, how long could you operate, right? Before you run out of cash? Well, that could be an important question, right? So what we call these monthly cash expenses, we call it the cash burn, right? Because we're running through our cash, we're burning it up. Okay? So here's how we're gonna calculate our cash to monthly cash expenses. Well, we're going to have our cash balance at year end. How much cash did we have and how much were those monthly expenses, right? So this is going to give us it's gonna give us a number of months. Okay? So this will give us a number of months that we could operate before we ran out of cash and we would just be stuck. So sometimes we calculate our monthly cash expenses, if they didn't give it to us directly, we could get the outflows from our operating activities on the statement of cash flows. So this would come from the statement of cash flows. Remember on our statement of cash flows, we would have 3 sections. We would have an operating section that shows all of our operations. And this is where we would see these expenses, right? The cash that we're spending on these expenses from operations. Then there's gonna be another section on the cash flow statement is the investing section and this deals with buying and selling fixed assets, long-term assets. And finally, there's a section, the financing section where we deal with our banks, with our debt holders, and, our equity, our stockholders okay? We don't have to get into too much detail about the statement of cash flows, that's for another discussion. But this is where we could get our cash outflows is from the statement of cash flows in that operating section because that's what deals with the operations with the business itself. So remember that the statement of cash flows is generally going to show a whole year, so we would get those cash outflows and divide it by 12. They're usually just gonna tell you what those cash outflows are straight up and you usually won't have to do so much calculation. This is a pretty rare ratio in general. So you're going to want to double-check if your teacher actually even cares about this ratio. It doesn't come up very often. Okay? But in the end, it's pretty easy. So if your professor does use it, you don't wanna miss these points because it's easy money. Alright? Let's go ahead and practice this ratio now.
Ratios: Cash to Monthly Cash Expenses - Online Tutor, Practice Problems & Exam Prep
Created using AIThe cash to monthly cash expenses ratio helps businesses, especially in healthcare, assess how long they can operate without incoming cash. This ratio is calculated by dividing the cash balance at year-end by monthly cash expenses, indicating the number of months the business can sustain operations. Monthly cash expenses can be derived from the operating section of the cash flow statement. Understanding this ratio is crucial for managing liquidity and ensuring financial stability in uncertain situations.
Ratios: Cash to Monthly Cash Expense
Video transcript
The Liquid Company had a cash balance at the end of the current year of $14,511. If the monthly cash expenses total $3,495, how long could Liquid stay in business before going bankrupt, assuming no cash inflows?
Tougher Company's had the following data for 2018 and 2017:
What was the increase or decrease in the ratio of cash to monthly cash expenses in 2018?
Here’s what students ask on this topic:
What is the cash to monthly cash expenses ratio and why is it important?
The cash to monthly cash expenses ratio measures how long a business can continue operating without receiving any additional cash inflows. It is calculated by dividing the cash balance at year-end by the monthly cash expenses. This ratio is crucial for assessing a company's liquidity and financial stability, especially in uncertain situations. For example, in the healthcare industry, where cash inflows often come from government programs like Medicare, understanding this ratio helps in planning and ensuring that the business can sustain operations even if these payments are delayed or stopped.
Created using AIHow do you calculate the cash to monthly cash expenses ratio?
To calculate the cash to monthly cash expenses ratio, you need two pieces of information: the cash balance at year-end and the monthly cash expenses. The formula is:
This ratio tells you the number of months the business can operate without additional cash inflows. Monthly cash expenses can be derived from the operating section of the cash flow statement by dividing the annual cash outflows by 12.
Created using AIWhy is the cash to monthly cash expenses ratio particularly relevant in the healthcare industry?
The cash to monthly cash expenses ratio is particularly relevant in the healthcare industry because a significant portion of cash inflows comes from government programs like Medicare and Medicaid, as well as third-party insurers. If these payments are delayed or stopped, healthcare providers need to know how long they can continue to operate with their existing cash reserves. This ratio helps healthcare organizations manage liquidity and plan for financial stability in case of disruptions in cash inflows.
Created using AIWhere can you find the data needed to calculate the cash to monthly cash expenses ratio?
The data needed to calculate the cash to monthly cash expenses ratio can be found in the company's financial statements. The cash balance at year-end is listed on the balance sheet, while the monthly cash expenses can be derived from the operating section of the statement of cash flows. The operating section shows the cash outflows related to the company's core business activities. To find the monthly cash expenses, you can divide the annual cash outflows by 12.
Created using AIWhat are the limitations of the cash to monthly cash expenses ratio?
While the cash to monthly cash expenses ratio is useful for assessing liquidity, it has limitations. It assumes that cash outflows remain constant, which may not be realistic as expenses can fluctuate. Additionally, it does not account for other sources of liquidity, such as lines of credit or the ability to quickly liquidate assets. This ratio also does not consider the timing of cash inflows and outflows, which can impact a company's actual cash position. Therefore, it should be used in conjunction with other financial metrics for a comprehensive analysis.
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