What Does Replenish Mean?

The concept of replenishing is associated with petty cash funds, mostly

managed through petty cash boxes. These funds are used for small day-to-
day operations and expenses. As these funds run out, cash is taken out of
the bank account and added to the boxes in order to replenish the fund.
Petty cash boxes serve as a support system to keep small processes up
and running since sometimes bureaucratic payment procedures may slow
down productivity.

The employee in charge of the petty cash funds would also be responsible
for issuing a replenishment order. The replenishment process starts by
reviewing the expenses that were made and paid with the petty cash. Then
additional cash is added to the petty cash box to increase the balance to
the pre-established balance. The advantage of a replenishment process is
that it ensures that the used funds are being properly audited.

Here’s a practical illustration.

Example
Mrs. Gordon is a personal assistant at Dr. Boldan’s dental practice. She’s
in charge of setting appointments, handing prescriptions, issuing invoices,
and managing the office’s petty cash box. The cash box was initially set
with $1,000 and the purpose of the funds is to keep the office fully
operational. Last week, Mrs. Gordon had to spend $250 in meals and $140
in office supplies. What would be the current balance of the petty cash box
and how much should be replenished?

According to our concept, replenishment is the action of refunding the

expenses paid with petty cash funds. In this case, the initial balance was
$1,000, if we subtract all the expenses Mrs. Gordon made ($390) the
remaining balance would be $610. That means Mrs. Gordon should ask her
office manager or employee in charge of cash in the bank, to replenish
$390 to the petty cash funds.
What are cash equivalents?
Cash includes legal tender, bills, coins, checks received but not deposited,
and checking and savings accounts. Cash equivalents are any short-term
investment securities that have maturity periods of 90 days or less. These
include bank certificates of deposit, banker’s acceptances, Treasury bills,
commercial paper, and other money market instruments.

Cash and its equivalents differ from other current assets like marketable
securities and accounts receivable, based on their nature. However, certain
marketable securities may classify as a cash equivalent, depending on the
accounting policy of a firm.

List of cash equivalents

The full list of cash equivalents includes the following items with maturity
dates that are typically three months or less:

 Banker’s acceptance
 Commercial paper
 Treasury bills
  Other liquid investments that mature within 3 months.

Companies may elect to classify some types of their marketable securities

as cash equivalents. This depends on the liquidity of the investment and
what the company intends to do with such products. Typically, this will be
disclosed in the footnotes of a company’s financial statements.

Working capital
Cash and cash equivalents are part of the current assets section of the
balance sheet and contribute to a company’s net working capital. Net
working capital is equal to current assets, less current liabilities.

Working capital is important for funding a business in the short term (12
months or less) and can be used to help finance inventory, operating
expenses, and capital purchases.

Importance in financial modeling and valuation

In financial modeling and valuation, cash is king. Financial analysts spend a
lot of their time “undoing” the work of accountants (accruals, matching, etc)
to arrive at the cash flow of a business.

When building a financial model, cash is typically the last item to be

completed and will reveal whether or not the balance sheet balances and if
the model is working properly.
The above example of cash equivalents is taken from CFI’s financial
modeling courses.

What’s not included in cash equivalents

Investments in liquid securities such as stocks, bonds, and derivatives
are notincluded in cash and equivalents. Even though these assets may be
easily turned into cash (typically with a three-day settlement period), they
are still excluded. These assets are listed as investments on the balance
sheet.