What is the difference between operating cash and excess cash, and how do you treat each?

cash needed for the operating business (working capital, supplier payments, payroll).

2–5% of revenue as operating. Excess cash: the balance beyond the operating-cash need − it can be paid out without disrupting the business (dividend, debt repayment). Bridge treatment:

• Strict method: operating cash stays in EV (part of the operating business), excess cash added separately to equity value.
• Standard IB method: subtract total cash from net debt ('Net Debt = Total Debt − Total Cash'). Method (2) is the standard, but for cash-rich targets (software, pharma) method (1) gives a cleaner valuation picture.