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Excess cash flow: The secret ingredient of successful businesses

Beyond operational needs, excess cash flow reserve symbolises a reservoir of potential for strategic investments and debt management. 

As a vital indicator of financial health, high excess cash flow signals robust performance and growth opportunities to investors. However, its management requires a delicate balance, ensuring effective allocation while maintaining growth. 

This article explores the concept of excess cash flow and distinguishes it from free cash flow. Let the journey begin!

Excess cash flow – Meaning

Excess cash flow is usually the cash that a company receives or generates through revenues or investments, which then leads to a payment to the lender as specified in their credit agreement.

This surplus cash is not just an idle asset. It represents potential resources that a company can use for strategic investments or debt repayments. Therefore, the management of excess cash flow is crucial for a company’s growth and overall financial performance.

Excess cash flow calculation

The calculation of excess cash flow is not standardised and can vary based on the specific terms of a credit agreement. However, a general approximation of the calculation could be as follows:

  1. Begin by determining the company’s net income or profit.
  2. Incorporate non-cash expenses like depreciation and amortisation.
  3. Deduct capital expenditures necessary to sustain business operations.
  4. Deduct interest payments, if any.
  5. The result is an approximation of the company’s excess cash flow.


Let’s take a hypothetical example 

Net income₹1,20,000
Non-cash expense₹20,000
Capital expenditure₹60,000
Interest pay₹10,000

Excess cash flow=₹1,20,000+₹20,000-₹60,000-₹10,000=₹70,000

There is another method to calculate the excess cash flow:

Excess cash flow=Total revenue-(Total liabilities-Total current non cash assets)


Let’s take a hypothetical example 

Total revenue₹1,50,000
Total liabilities₹1,10,000
Total current non-cash assets₹70,000

Excess cash flow=₹1,50,000-(₹1,10,000-₹70,000)=₹1,50,000-₹40,000=₹1,10,000

Credit agreements can specify both the required excess cash flow amount for triggering a payment and the designated use or expenditure of cash.

Events triggering mandatory payments

When a business raises more capital, it is a typical occurrence that necessitates mandatory cash paid in excess cash flow. Stock offerings, bond sales, or the liquidation of company assets are all potential means of achieving this goal. 

When such an event happens, the company typically has to reimburse the lender for the amount raised, after deducting any expenses incurred in raising that capital.

As an example, if a company raises ₹1 million through a stock issuance and incurs ₹100,000 in expenses related to the issuance, it would need to pay the lender ₹900,000.

Implications of excess cash flow

Excess cash flow holds great importance for both the company and the lender. Excess cash flow is a valuable asset for the company, providing opportunities for strategic investments, or debt repayments. It indicates strong financial well-being and can boost the company’s standing with investors.

Nevertheless, effectively managing surplus cash flow requires careful navigation. Having excess cash is advantageous, but companies need to make sure they use it wisely to promote growth and profitability.

However, lenders are also highly interested in a company’s excess cash flow. It reduces the risk of default and serves as a repayment mechanism. Nevertheless, lenders must exercise caution when implementing restrictions and limitations on the utilisation of surplus cash flow. 

The company’s financial health and growth potential should not be hampered by these regulations that are too stringent.

Managing excess cash flow is a delicate balancing act that necessitates astute decision-making to optimise its advantages while mitigating any potential drawbacks. 

Difference between free cash flow and excess cash flow

Free cash flow (FCF)Excess cash flow
DefinitionAfter deducting the funds required to run the business and pay for fixed assets, the remaining amount is the free cash flow.A company’s excess cash flow is the amount of money it retains after paying all of its operating expenses and financial commitments.
CalculationCapital expenditures are subtracted from net operational cash flow to get FCF.Calculating excess cash flows can vary depending on the specific requirements of each credit agreement, making it difficult to follow a set formula.
UsageTo evaluate a company’s solvency in meeting its debt and equity investor commitments, free cash flow (FCF) is an important statistic. Cash on hand following payment for operating expenses and capital expenditures is considered.In most cases, there are specific uses or limitations placed on a company’s excess cash flow.
ImplicationsOne useful metric for assessing the health of a company’s underlying trends and its value is free cash flow (FCF).Efficiently managing excess cash flow is vital for a company’s growth and overall financial performance.



Excess cash flow is the financial surplus that a company has after fulfilling its operational and financial obligations. It is an essential tool for driving strategic expansion, reducing debt, and providing value to shareholders. 

It serves as a clear indication of a company’s achievements and a guiding light for future investment and expansion plans. Investors must comprehend excess cash flow since it reveals important information about the financial health of a business.


What is surplus cash flow?

Surplus cash flow refers to the cash that remains after a company has paid all of its expenses, including operating costs and capital expenditures. It’s essentially the extra cash that can be used for various purposes such as reinvestment in the business, debt repayment or saving for future use. Having surplus cash flow is a positive sign of a company’s financial health. 

Is excess cash a current asset?

Yes, excess cash is considered a current asset. It falls under the category of ‘cash and cash equivalents’ in a company’s balance sheet. Current assets are resources that are expected to be used up or converted into cash within one business cycle — typically a year. Excess cash can be used for various purposes such as reinvestment, paying off debt, or distribution to shareholders.

Is free cash flow excess cash?

Free cash flow and excess cash are different financial concepts. Free cash flow refers to the cash a company generates after accounting for capital expenditures like equipment or buildings. It’s the cash available for distribution among all the securities holders of a corporation. On the other hand, excess cash is the cash that exceeds the necessary working capital and capital expenditure. It’s the leftover money after a company has met all its operational and capital investment requirements.

What is an excess cash deposit charge?

An excess cash deposit charge is a fee that banks may impose when customers deposit cash beyond a certain limit. The charge varies depending on the bank’s policy and the type of account. It’s designed to encourage digital transactions and manage the costs associated with handling large amounts of cash. Always check with your bank for specific policies and charges related to cash deposits.

What is the difference between required and excess cash?

Required cash is the minimum amount of cash a company needs to meet its operational expenses, pay off debts, and invest in necessary assets. It’s essential for day-to-day business operations. On the other hand, excess cash is the cash that exceeds this necessary amount. It’s the leftover money after a company has met all its operational and capital investment requirements. Companies can use excess cash for growth opportunities or return it to shareholders.

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