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An estimation of the number of day a company can cover its operations with its most liquid assets.[sc:kit02 ]
Expense Coverage Days Formula
Explanation of Expense Coverage Days
Expense Coverage Days estimates the number of days that a company can pay for its business operations with cash and other liquid assets. This can also be used to expose situations where the company may be hording assets, which may be better put to use elsewhere in the company. The total cash expenditures are divided by 365 to convert the result to days.
Importance of Expense Coverage Days
An increasing Expense Coverage Days value is generally a positive sign, indicating the company can pay for its business operations with cash and other liquid assets for a longer period of time. Knowing how long the company can continue operations without any influx of cash is very important. Sometimes markets dry up quickly, poor management decisions send customers running to their competitors, and unforeseen disasters and events could all cause cash flows to slow or stop completely. Unless the company can secure cash or finance their operations another way, they will be left to survive on their liquid assets.