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Financial Accounting

Learn the toughest concepts covered in your Financial Accounting class with step-by-step video tutorials and practice problems.

Table of contents
14. Financial Statement Analysis

Ratios: Cash to Monthly Cash Expenses


Ratios: Cash to Monthly Cash Expense

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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 uh at the company? So the cash to monthly cash expenses it considers this hypothetical hypothetical situation, if we, let's say we stopped receiving cash right now, if all our cash, just what we have 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 health care, 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 if for some reason the government, right, maybe you 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, 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 our cash to monthly cash expenses. Well, we're gonna have our cash balance at year end, How much cash did we have? And how much were those monthly expenses. Right? So this is gonna give us um 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, 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 three sections, we would have an operating section that shows all of our operations. And this is where we would see these 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 um in that operating section, because that's what deals with the operations with the business itself. So remember that the statement of cash flows, it's generally gonna show a whole year. So we would get those cash outflows and divided 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 gonna 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 if your professor does use it, you don't want to miss these points because it's easy money. Alright, let's go ahead and practice this ratio now.

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?