How do you estimate minimum cash balance for the company? 2 ways I heard about are: 1) keep it equal to cash balance on B/S and 2) based on Net Working Capital. Is any of those methods preferred? Is there any other school of calculation that? And, if NWC method, then what exactly do you include in calculation (like include or excl. cash)?
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3) 6 months of operating expenses
Never heard the NWC method.
There are really two steps when determining minimum cash balance
Step one: Use one of the above methods Step two: Replace your answer from step one with whatever your VP or Director tells you
This is exactly correct.
This. Step 2 applies to every assumption in your model, btw.
Whatever your senior banker tells you...seriously...they will pull a number out of their ass
Unless you work in an odd ball group, most of the time a minimum cash balance is needed for ABL collateral commitments for the company in question's revolving credit facility. Getting this number should be same procedure as getting the cost debt for you WACC from DCM. Shoot a call over to your banks corporate finance group to an analyst you're cool with and see if they can give you a min cash balance for an ABL revolver w/ the same terms as their existing.
Also, fairly certain it's not a good idea to just set min cash balance to equal the cash on their balance sheet for two reasons: 1) Sometimes companies will lump in cash equivalents in that item and not breakout appropriately, so could be misleading on your model about the companies ability to service short term liabilities, 2) Debt further down on the capital structure's covenants could also have minimum cash requirements, and if you ran a scenario on your model that zapped the cash to cover the companies revolver repayment you could in actuality trip the covenants on less sr. debt.
lol :)
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