The Postal Service regularly and alarmingly reported that its “days of cash on hand” had dipped into the single digits during the downturn. Recently, the USPS has reported that this ratio is up to 24 days, which is great news.
The USPS Office of Inspector General released an audit report on October 20 that says postal management has been calculating this ratio incorrectly which could lead to less-than-optimal decisions. The OIG said that calculated the usual way, the true number of days’ cash on hand is 36, an even stronger liquidity position.
As days’ cash on hand is a commonly but not widely used financial analysis ratio, not an official accounting standard, people can disagree on the best way to calculate it. But there normally is a method that most analysts use.
The OIG states it uses a denominator of 365 days in a year, and excludes capital spending in the daily expenditure rate that is compared to cash on hand. If you google it, that is the way everyone seems to calculate the ratio. The Postal Service uses “banking days” of 251 and includes capital spending. Both of these postal approaches pump up the measurement of daily spending and dilute the measurement of days’ cash on hand.
The good news from this is that USPS financial liquidity is either very strong or very, very strong. Days’ cash on hand assumes an entity’s revenue stream is curtailed abruptly and extremely. The Postal Service has strong cashflows and will report another operating profit for FY 2016 on November 15. USPS is highly unlikely to face another cash crunch anywhere near as severe as it did during the worst recession since the Great Depression.
The Great Recession combined with accelerated electronic diversion to create the perfect storm for USPS. And it survived and is now flourishing. The system worked. The exigent surcharge pumped over $4 billion of customers’ money into the USPS and it reduced costs to a degree it never had before.