do you Agree that the organization must balance between its profit and cash? Tha
ID: 2655406 • Letter: D
Question
do you Agree that the organization must balance between its profit and cash? That is if the organization has a lot of cash it might lose its profitable position and as a result lose its credibility in the market. Do you agree ? do you Agree that the organization must balance between its profit and cash? That is if the organization has a lot of cash it might lose its profitable position and as a result lose its credibility in the market. Do you agree ? do you Agree that the organization must balance between its profit and cash? That is if the organization has a lot of cash it might lose its profitable position and as a result lose its credibility in the market. Do you agree ?Explanation / Answer
The question concerns the trade-of between profitability and liquidity (holding of cash or cash equivalent).
While a low liquidity can put the firm in a liquidity crisis - inability to pay its short term obligations, caused by lack of sufficient cash - holding too much cash will eventually hurt its profitability. This is because, opportunity cost of holding idle cash is too high. A firm that has too much excess cash, but not investing in any projects, will send a negaive signal to the investors that the firm does not have any profitable opprtunities (projects) in which it can invest its excess cash. Even if it does not hurt its current profitability, it will shake investor confidence and over time, investors may pull out their investment from the firm, thus adversely impacting its market position and eventually, profitablity.
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