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Home Questions Logic behind "excess cash"?

Logic behind "excess cash"?
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4:15 pm
August 18, 2011


Jae Jun

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excess cash is the "cash" that is not required by the business to run its day to day operations. Think of it as the money that can go in the savings account.

 

MAX(0,Current Liabilities-Current Assets) is a mathematical function where you choose either 0 or current liabilities-current assets, whichever is the higher number.

 

If there are more liabilities than assets, then obviously, the business requires more cash to run and therefore it may not have any excess cash.

Try this example.

Total cash = $300

current liabilities = $500

current assets$ = $300

As you can see, part of the total cash has to pay for the short term liabilities. Excess cash in this example is $100.

 

Excess Cash = Total Cash – (Current Liabilities – Current Assets – Total Cash) is a more conservative estimation, but essentially the same thing.

 

8:48 am
August 18, 2011


vdell

Member

posts 10
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Post edited 1:54 am – August 18, 2011 by vdell

Hi Jae and others,

 

Could someone elaborate the logic behind the excess cash calculation:

 

Excess Cash = Total Cash – MAX(0,Current Liabilities-Current Assets)

 

What does the MAX(0,…) translate to in plain english (i.e. why are cur. assets subtracted from cur. liabilities)? In this article, the excess cash is calculated as:

 

Excess Cash = Total Cash – (Current Liabilities – Current Assets – Total Cash)

 

TIA
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