neededforoperationsisnoteasy,thoughtherearethreeways
in which this estimation is made:
1.Ruleofthumb.Fordecades,analystshaveusedrules of
thumbto defineoperating cash.One widelyusedvariation
definedoperatingcashtobe 2 percentofrevenues,thoughthe
original source for this number is not clear. Using this
approach,afirmwithrevenuesof$100billionshouldhavea
cash balanceof$2 billion. Anycashheld inexcess of $2
billionwouldbeviewedasexcesscash.Thedisadvantageof
this approach isthat itdoes not differentiate acrossfirms,
with large and small firms in all industries treated
equivalently.
2.Industryaverage.Analternativeapproachthatallowsusto
differentiate across firms in different industries uses the
industry averagesreportedinAppendix 10.1.Based onthe
presumptionthatthereisnoexcesscashintheaveragecash
holdingsofthesector,theindustryaveragesbecomeproxies
foroperatingcash.Anyfirmthatholdsacashbalancegreater
thanthe industry average will therefore be holdingexcess
cash.
3.Cross-sectionalregressions.Whenexaminingthemotives
forcashholdings,wereferencedseveralpapersthatexamine
thedeterminantsofcashholdings.Mostofthesepaperscome
totheirconclusionsbyregressingcashbalancesatindividual
companies against firm-specific measures of risk, growth,
investment needs, and corporate governance. These
regressionscanbeusedtoobtainpredictedcashbalancesat
individual companies that reflect their characteristics. Any
cash in excess of this predicted balance is viewed as
non-operating cash.