A company’s cash needs fall into three categories: (1) cash for day-to-day transactions, (2) reserve cash to meet contingencies, and (3) cash for compensating balance requirements. A compensating balance exists when a firm must keep minimum cash balance in a noninterest bearing account at a bank as a condition or a loan or bank service agreement. To determine the appropriate minimum cash balance, a financial manager simply adds together the three segments just estimated. If the cash budget projects a balance significantly higher than the minimum balance, the organization can invest the excess cash in marketable securities. On the other hand, if the cash balance falls below the desired level, the organization can plan to sell marketable securities or to borrow shortterm funds. To complete the transition from a cash flow budget to a cash flow plan, the manager must adjust the cash balance to meet the minimum cash balance. In other words, compensating balance is a deposit that the firm keeps with the bank in a lowinterest or non-interest-bearing account to compensate banks for bank loans or service.