Minimum operating cash

Every business needs a working balance to bridge the gap between paying suppliers and collecting from customers, absorb seasonality, and meet payroll on time. That float is not restricted by any contract, and it is also not available to distribute, which is what makes it awkward.

Practitioners genuinely disagree about it, and this is worth saying out loud in an interview. In a comparables table most analysts net all cash, because consistency across a peer set matters more than precision on any one name and nobody can see each company's true operating requirement. In a transaction the buyer must fund the float on day one, so it is normally excluded from the cash that reduces the price.

The size of the argument depends on the business. A retailer collecting cash daily and paying suppliers on terms may need almost nothing. A project business with lumpy receipts and a large payroll may need a great deal, and the difference can be several percent of equity value.

The rule that survives either convention is consistency. Applying an operating cash haircut to the target while netting all cash for the peers manufactures a discount that does not exist, and it is the version of this error that actually gets made.

Keep it distinct from the minimum cash balance held in a model. That is a forecasting assumption about when a revolver draws. This is a valuation judgement about how much of a reported cash balance is genuinely available to reduce the price. They often land on a similar number and they answer different questions.