Please respond to the post below on whether you agree with their view or not and

Question

Please respond to the post below on whether you agree with their view or not and why you feel this way. Must be at least two paragraphs.

It is possible to have too much cash inside the firm at one time. Cash on hand that exceeds operations and scheduled expenditures is missing opportunity costs such as investments that would increase profits. Excessive on hand cash within the firm jeopardizes management decisions whereas a lower amount of cash forces decisions to be made with consideration of cash flow and capital spending. According to Picard (2011) "money sitting unused creates opportunity costs, so boards typically want to use it to clear high interest debt, to buy back shares, to make acquisitions, or to increase dividends" (para. 5). Some firms associate having too much cash as increasing the cost of goods without an increase in prices. Excess cash can lower a firm’s return on assets, increase the cost of capital or increase overall risk by destroying the value of the firm. Shareholders are concerned with large amounts of cash within a firm because it can lead to poor investment decisions. It can also signal to investors that the firm has run out of investment opportunities. Alternatively, a firm that allows growing cash signals strong company performance. If there is too little cash then it could mean that cash reserves are less than its expenditure requirements which is signaling not enough revenues to meet expenses.

A few options available to a firm holding too much cash consist of dividend payments, stock repurchase, and reduce debt by paying creditors. Too little or insufficient cash results in a firm that must borrow, sell stock or improve profitability.

Explanation / Answer

I totally agree with what have been stated. It is true that a firm can hold excessive cash but there are a no of problems arises of holding that excessive Cash in Hand. If there are excessive cash, there can be misappropriation of funds. There can also be cash embazzelment.

It may also lead to the bad decisions of the managers, excessive cash may decrease profits of the firm. The asset is of no use if there no proper utislisation of the assets. Excessive cash in hand shows that the firm has not properly utislised the funds of the firm and it also affects the financial position of the firm. Cash should always be invested from where we can get maximum returns.

Deficiency of cash is also not good for the company because there may be shortage of funds when the funds are required to increase the profits of the firm.

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