What is "excess cash" in a DCF valuation?

In the context of a DCF valuation, "excess cash" refers to cash that a company holds beyond what is necessary for its day-to-day operational needs. This excess cash is not needed for the ongoing operation of the business, such as payroll, inventory purchases, or other immediate expenses, and can be considered a surplus that the company can deploy elsewhere, either through investment, paying down debt, or returning to shareholders.

In evaluating a company's value, it's crucial to identify excess cash as it can impact the overall valuation and enterprise value. When performing a DCF, this surplus is often added to the valuation after calculating the present value of future cash flows, giving investors a clearer picture of the company's available resources. This distinction is vital as it separates the cash necessary for standard operations from additional liquid assets that the business can utilize for growth or shareholder returns.