Please respond to this post with whether you agree or disagree with their post,

Question

Please respond to this post with whether you agree or disagree with their post, why you take that stance and at least one APA cited reference that supports your view.

A company can hold too much cash and for the following reasons, shareholders can show just concern:

When a firm holds cash in excess of some necessary minimum, it incurs an opportunity cost. The opportunity cost of excess cash (held in currency or bank deposits) is the interest income that could be earned by the next best use, such as investment in marketable securities (Taken from Ross & Westerfield, p. 835).

A company needs to balance the benefits of holding cash to meet transactions and avoid insolvency against the opportunity costs of lower returns. A sensible cash management policy is to have enough cash on hand to meet the obligations that may arise in the ordinary course of business and to invest some excess cash in marketable securities for precautionary purposes. All other excess cash should be invested in the business or paid out to investors (Taken from Ross & Westerfield, p. 836).

If the firm maintains too small a cash balance, it may run out of cash. If this happens, the firm may have to raise cash on a short-term basis. This could involve, for example, selling marketable securities or borrowing,activities that involve various costs. (Taken from Ross & Westerfield, p. 835).

Explanation / Answer

I agree with the post. Idle cash itself cannot generate any cash or cannot be productively used as such. No doubt some amount of cash is required all the time to run business, but excess cash kept idle means we are losing opprtunity income. In simple terms, money generates money. Keeping cash idle means you are not using it for better purpose. It does not make sense to keep huge amt of cash idle. If the nature of business is such that it generates huge amt of cash, it should be invested in some securities or FD or any sort of investment. If we know we have to make payment from such cash in some time, we can plan our investment accordingly i.e. monthly, quarterly, yearly etc.

Also at the same time, some small amt of cash for immdetate day to day payments in say 2 days or week, should be kept all the time. Managment of cash is must. Also it can't be standardise. If for one comapny $10000 is nominal, the same amt for other comapny can be huge. Cash management will also depend on how much liquidity your business requires and what are credit terms etc. Raising cash from outside will cost you interest and usually interest recvd is always less then borrwing cost on the same amt in almost all cases. So it doesnt make sense you invest 10,000 to earn a return of 8% and borrow that 10,000 and pay interest at 13%. this will mean u r loosing 3% of your profit when u could have saved it.

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