A minimum liquidity policy that is not derived is a number somebody liked. Derived, it is three components — and the commonest way of testing cash against it counts one of them twice.
Add three things and you have a policy you can defend: the float the business needs to keep
paying, a reserve sized on the measured error of your own cash forecast, and the seasonal
peak your annual plan already knows about. On the company in this book that is
124,596,281.16 — and the .16 on the end is the first sign it was
derived rather than chosen.
The three components
Component
Where it comes from
Amount
Operating float
6 business days of disbursements at 5,232,000.00 a day
31,392,000.00
Forecast-error reserve
z = 2.326 on the standard deviation of the thirteen-week error
31,204,281.16
Seasonal peak
the third-quarter inventory build, net, from the annual plan
62,000,000.00
Minimum liquidity
of which 93,204,281.16 sits above the float
124,596,281.16
Added rather than combined statistically: in a bad quarter the three are not independent, and adding is the prudent convention.
Measure the forecast error, do not guess it
The reserve is the only component that is not a policy choice, and it is the one most often
invented. It comes from the cumulative thirteen-week error of the company's own rolling forecast,
over the last twelve quarters, as a share of the quarter's disbursements.
Statistic
Value
Quarterly disbursements
327,000,000.00
Mean error — the bias
0.5750 per cent
Sample standard deviation
4.1026 per cent
… in money
13,415,426.12
Reserve at one-sided 95 per cent (z = 1.645)
22,068,375.97
Reserve at one-sided 99 per cent (z = 2.326)
31,204,281.16
Reserve at one-sided 99.9 per cent (z = 3.090)
41,453,666.72
Twelve observations is a thin sample, and the confidence level is a policy choice like any other.
The mean error is a bias of 1,880,250.00 a quarter, not noise. A bias
is something to find and remove rather than to hold a reserve against — but until the line
responsible has been found, the reserve should carry it:
33,084,531.16 on these figures.
The double count — the mistake worth naming
Here is the error, and it is common enough to reproduce rather than to warn about. The float is
held back from cash, giving available cash of 120,608,000.00. The float is also a component
of the minimum, giving 124,596,281.16. Test the first against the second and the float
has been counted twice: the company appears to be
-3,988,281.16 short of its own policy, and the report says so.
The float is either in the cash or in the requirement, never both.
Available cash already excludes it, so it is tested against the minimum above the float,
93,204,281.16. Accessible cash still contains it, so it is tested against the total,
124,596,281.16. The two bases give the same answer by construction.
Basis: available cash
Basis: accessible cash
Cash
120,608,000.00
152,000,000.00
Undrawn committed facility
250,000,000.00
250,000,000.00
Headroom
370,608,000.00
402,000,000.00
Minimum tested against
93,204,281.16
124,596,281.16
Over the minimum
277,403,718.84
277,403,718.84
Same answer on either basis. Mixing them is what produces the -3,988,281.16.
Then ask the question the policy is for
The minimum is not the interesting number; the margin over it without the conditional part of
the liquidity is. Take the undrawn facility out and the margin is
27,403,718.84 — 5.2377 business days
of the company's own payments. That is the line worth putting on the monthly report, every month,
in the same place, so that the quarter in which it matters is not the first time anybody reads
it.
What to do with this
Write the three components down with their sources, sensitise each of them, and say on the line
which are policy choices: the 6 days, the confidence level, the treatment
of the bias. Then test cash against the minimum on one consistent basis, and check which one you
are on by asking whether the float appears on both sides.
The workbook behind this article
Every figure above is a live formula in the companion files for
Treasury Management — the five readings of cash, the liquidity
test, working capital and the discount, and the hedging book. Each file ends with a Checks
sheet setting the printed figure beside the computed one. They are free, and they need no
account and no email address.
At what wealth does a family office pay?A five-person office costs the same $2,442,000 at $100m as at $2bn. Against a tiered multi-family schedule the two curves cross exactly once.
Does an undrawn revolver count as liquidity?67.4567 per cent of the headroom, and it leaves at a fall in annual revenue of 8.4127 per cent — not the 13.3333 per cent the board deck implies.
Does supply chain finance count as debt?66,049,315 released, and leverage of 2.7622× or 3.1362× depending on which balance the test is asked of — the second is a breach at today's EBITDA.
Does the fulcrum move with enterprise value?A worked capital structure at three enterprise values. The break migrates from the first lien to the subordinated notes without a single document changing.
How many companies does a reserve pool defend?Holding pro rata to the Series D costs $14.76m per company. A $40m reserve defends 2.71 of forty — and 61 per cent of the cost is the last round.
How much room a 1.15x downside actually leaves79 basis points of margin. The leverage covenant fails first, five basis points before the coverage covenant the chapter reports on, and 4.6 per cent of EBITDA is the whole cushion.
How the GP catch-up is actually solvedMost write-ups state the catch-up formula then hardcode the answer. Set it as a solve and it moves on its own when the carry rate does.
How do you set a minimum cash balance?Three components, 124,596,281 in total — and the double count that turns a margin of 27,403,719 into an apparent shortfall of -3,988,281.
Is a 2/10 net 60 discount worth taking?An annualised 14.8980 per cent against a revolver at 4.50 per cent — worth 5,471,890 a year, and 0.3132 turns of reported leverage.
Should corporate debt be fixed or floating?78.1818 per cent of gross debt fixed, and a net floating exposure after cash of -608,000.00 — the proportion, not the instrument.
Six ways to state the same fund's return7.12 per cent, 18.04 per cent, or 1.323 times the public market — one fund, one set of flows. The eleven-point gap is the valuation, and it is not cash.
The IRR at which a closed-ended fund merely tiesA drawdown fund advertising 13.25 per cent ties an evergreen netting 8.64. On committed rather than called capital, 78.7 per cent of the edge vanishes.
The month a remediation trigger has to be armed byMonth 8, on a one-year window and a 14-week hiring lead time. The date is 12W − L/4.33 and holds for any portfolio size — the book only changes the euros.
Two routes to the same NAVFive findings in one quarter-end close, and not one of them was a modelling error. Every one was a control that did not exist.
What a CBAM certificate buffer costs to holdCarry and protection are both linear in the buffer, so the break-even probability is identical at 5 per cent and at 30 — and 2027 costs exactly twice 2026.
What a clawback actually collateralises24 million recovers 13.20 net of tax and 7.20 is escrowed. The rule is e ≥ 1 − t, and every euro won on the tax clause lands uncollateralised.
What a co-investment programme actually saves37 basis points, and a 22.8 per cent total-loss rate erases it. At the usual per-deal cap a single failure is 37 per cent of the annual cohort.
What a diligence exercise actually recoversEighteen basis points is only the part that reaches the yield. Three of the four instruments never do, and the exercise is worth thirty-one.
What a follow-on reserve is actually worth0.019 turns under plain dilution, 0.285 under pay-to-play. The optimum is a property of the shareholders’ agreement, not of the portfolio.
What a lease mark-to-market is actually worth5,788,000 becomes 807,365 once the over-market stream, the expiry dates and the cost of re-letting are priced — and nothing at all below a 43.7 per cent renewal rate.
What a minimum payment actually does£81.53 leaves the account and £20.46 reaches the debt. On minimums alone the set clears in 258 months and repays 1.78 times what was borrowed.
What a month of delay costs in an enforcement463,000 euros of present value a month. No single error about enforcement, and no pair of errors, moves the indifference point from 58.7 cents to the 72 on the table.
What a pro rata cheque actually costsDefending costs 1.25 times the initial cheque across two rounds, not more in each — and below a 521 exit the follow-on dollars come back worth less than they cost.
What a subscription line does to the IRR20 per cent becomes 38.41 on the same asset while the multiple falls. Two dollars of interest buys 18.4 points, and the longer the line runs the cheaper each point gets.
What one point of fees actually costsOne point on the annual charge turns 738,846 into 567,961 over forty years — 23 per cent of the pot, and 2.43 of wealth lost per 1 of fee.
When the promote stops clearingCarried interest is not proportional to performance near the hurdle. It is a step function, and $2m of headroom is what stands between a promote and none.
Why a secondaries bid-ask gap has no zoneThe seller’s floor and the buyer’s ceiling are one formula at two rates. At equal required returns the zone is exactly zero — here it is 11.02 points apart.
Why refining a due diligence rubric makes it weakerThree of twelve managers carry a terminal flaw and the average approves all three. Splitting eight domains into sixteen makes it easier to hide, not harder.