See Inputs and Balance Sheet for general instructions.

•   Recommendation: Enter zero for Operating Cash for first-cut valuation.  Operating Cash requirement of a business is difficult to estimate. For most situations, Operating Cash requirement is likely to be small relative to the value of the business and hence can be safely assumed to be zero. For these reasons, Enterprise value determination generally excludes cash on the balance sheet. However, there are exceptions to such exclusions (see “Exception” below).

•   Operating Cash is not the actual cash on Seller’s balance sheet. Many owners keep excess cash in the business, which should be excluded from valuation.

•   Operating Cash is not the same as Working Capital. The need for Operating Cash arises due to timing differences between customer payments and certain expenses like payroll, rent, etc. Factors affecting Operating Cash are payroll cycle, product shipment regularity, billing cycle, seasonal nature of the business, collection timing, etc. According to one school of thought Operating Cash equals the amount of cash required to cover one payroll cycle.

•   For the future years, Operating Cash increase/decreases in proportion to Sales. That is, as Sales grow so does required Operating Cash. Example: If Operating Cash is 100 in Year-0, and if sales increase by 10% in Year-1, Operating Cash for Year-1 will increase to 110, an increase of 10 from Year-0. Changes in Operating Cash requirements are included in cash flow calculations.

•   Operating Cash is different from Cash Reserve @ Year-End and Excess Cash. Operating Cash is cash needed to sustain the operations; Cash Reserve is a safety cushion. Excess Cash is the cash raised at closing, but is not paid to the Seller.

•   Exception: Operating Cash may be a high number if the business has “customer deposit” liabilities that are transferred to the buyer. See Accounts Payable.

•   Operating Cash, Cash Reserve and Excess Cash are grouped together on the balance sheet.