In previous posts, we outlined how to use the financial statements of a water or wastewater system to calculate the key financial indicators of operating ratio (a measure of self-sufficiency) and debt service coverage ratio (a measure of a system’s ability to pay its long-term debts). Another key financial indicator is days of cash on hand.
Days of cash on hand is a measure of a system’s financial security. In essence, this is how much cash a system has saved up that isn’t earmarked for anything else (unrestricted cash) and estimates the number of days the system can pay its daily operation and maintenances costs before running out of this cash. This is obviously a worst-case scenario—it estimates how long a system can run if it receives no additional revenue, but it is a helpful measure of how long a system can operate if it has a sudden and dramatic reduction in operating income, perhaps from a large customer leaving or from mandatory restrictions due to drought conditions.
