What is the purpose of maintaining a minimum cash balance in an LBO model?

Maintaining a minimum cash balance in a leveraged buyout (LBO) model primarily serves to ensure that the company has sufficient liquidity to meet its daily operational needs and manage its working capital (NWC) requirements. This is vital for ongoing operations, as it helps to safeguard the company against unexpected costs or fluctuations in cash flow.

A minimum cash reserve acts as a buffer that can handle daily transactions, payroll, supplier payments, and other necessary expenditures without resorting to additional borrowing or liquidating investments at unfavorable times. This level of financial prudence allows the company to maintain operational stability, which is critical when managing a highly leveraged capital structure typical in an LBO scenario.