MW Insights – April 2023
Welcome to the April 2023 edition of MW Insights. This month marks a change to the newsletter being issued on a bi-monthly basis (who wants too many newsletters?).
This edition’s topic is: Cash – Operating asset or surplus?
MW Insights
Cash. Every business needs it however its treatment in a valuation can vary widely.
Some valuers take a hard-line approach that all cash is surplus as cash is not a revenue generating asset and is therefore non-operating (or surplus) in nature. We are of the opinion that cash needs to be considered on a case-by-case basis.
In most situations where a business is profitable or has sufficient working capital, then cash is generally surplus. It can be argued that an amount of cash to cover 1 to 2 weeks’ worth of expenses (including costs of sales) can be counted as operating however generally no more than this would be appropriate in our opinion.
Smaller businesses tend to have irregular cash flows, inconsistent turnover, and even periods of deficient working capital. This is when a hard-line approach can ignore the realities of small business. In these situations it is often appropriate to adopt larger amounts of cash as surplus, ranging from 1 months’ worth of expenses upwards.
As always, you can reach out at any time (03) 9816 9122 or email us at advice@mwforensic.com.au if you require our assistance or want to talk Business Valuations and Forensic Accounting.
Regards,
Joshua, Victoria, and Russell