Introduction
It is hard to disagree that businesses must consider and control many operations, processes, and concepts. Some of them may have different options, including having either larger or smaller cash balances. An organization can benefit from holding a considerable amount of liquid investments, but only if it pays attention to specific risks and disadvantages associated with sizable cash balances. Many major companies, such as Alphabet and Apple, demonstrate that liquid assets are a valuable option that offers advantages like attracting investors, reducing the risk of expropriation, and securing the ability to fulfill obligations, among others.
Advantages and Disadvantages
One may find it challenging to disagree that having excess cash on the company’s balance sheet may be both beneficial and concerning. For example, one primary advantage is for new businesses, which often require time to attract clients. Additional money can help them meet their daily goals and obligations even without having good revenue (Reddy, 2020). Furthermore, a large balance can help firms manage their cash flow effectively.
Next, if unforeseen unfavorable circumstances arise, such as decreased revenue, excess cash can significantly help the organization. According to Chou and Feng (2019), liquid assets can also reduce the risk of expropriation. Firms with sizeable amounts of cash are also more preferred by investors, which is an excellent bonus for growing businesses (Roisman, 2021). Another advantage is closely linked to the previous one. Even if revenue is absent for a specific period, a company with a large cash balance can still fulfill its primary obligations, including loan payments, administrative expenses, rent, payroll, and other essential costs.
Next, it is essential to list some disadvantages to prove that having large cash balances is not an option for all firms. Thus, Deb et al. notice that “excess cash is detrimental in firms that are ‘poorly governed, diversified, or opaque’ (where power and information asymmetries across stakeholders may obscure or prevent its optimal allocation)” (as cited in Bentley & Kehoe, 2020, p. 188).
Large cash balances can lower return on assets because companies lose their opportunity to invest excess money in profitable projects. Lastly, researchers also indicate that “too much cash on hand increases the cost of capital” (Reddy, 2020, para. 3). Overall, while these disadvantages are not as significant as the listed pros, it is still recommended that firms consider them.
Identifying Successful Companies
There are many firms with sizable amounts of cash and liquid investments on their balance sheets. One may suppose this is one of their secrets to success and competitiveness. Thus, Alphabet, a U.S. multinational conglomerate company, is the first firm to be identified.
This firm’s cash on hand, including all liquid investments, “for the quarter ending September 30, 2022, was $116.259B, an 18.13% decline year-over-year,” and in 2021, it was “$139.649B, a 2.16% increase from 2020” (Macrotrends, 2022a, paras. 2-3). In 2019, it was indicated that Alphabet overtook Apple to become the richest in cash and liquid investments (Porter, 2019). These liquid assets help the corporation become even more competitive.
Therefore, the second firm to review is Apple – another major American technology corporation. Although there is a severe decline compared to the year 2019, Apple’s cash balance is still considered quite sizeable: its “cash on hand for the quarter ending September 30, 2022, was $48.304B” (Macrotrends, 2022b, para. 2). Therefore, since these corporations are extremely successful, firms that want to manage their excess cash effectively should analyze the cases of Apple and Alphabet.
Reasons to Increase Cash and Liquid Investments Balances
As evident from the listed advantages of sizeable cash balances, many firms may prefer to continue increasing their liquid assets for many reasons. First, it is highly beneficial for businesses seeking to attract new investors, as these investors tend to prefer companies with larger cash reserves (Roisman, 2021). Next, suppose a firm anticipates that there may be serious troubles in the future, potentially leading to a higher risk of expropriation or a sharp drop in revenue.
In this case, it may want a larger cash balance to secure its operations (Kontuš & Mihanović, 2019). Another reason to focus on liquid investments is to reduce borrowing and increase financial independence. Finally, it is also possible that a company can increase its cash balance and other liquid assets if there are no promising projects worth investing in.
Conclusion
To conclude, firms should consider both the advantages and disadvantages when deciding whether they need to maintain large cash balances. While it is evident that the benefits outweigh the risks in most cases, poorly governed, not transparent enough, and highly diversified companies should be cautious with their liquid assets. However, if they manage their cash on hand correctly, some advantages they can receive are more investors, excess money for emergencies, efficiently managed cash flow, and others.
References
Bentley, F. S., & Kehoe, R. R. (2020). Give them some slack — they’re trying to change! The benefits of excess cash, excess employees, and increased human capital in the strategic change context. Academy of Management Journal, 63(1), 181-204. Web.
Chou, T. K., & Feng, H. L. (2019). Multiple directorships and the value of cash holdings. Review of Quantitative Finance and Accounting, 53(3), 663-699.
Kontuš, E., & Mihanović, D. (2019). Management of liquidity and liquid assets in small and medium-sized enterprises. Economic Research, 32(1), 3247-3265. Web.
Macrotrends. (2022a). Alphabet cash on hand 2010-2022 | GOOGL. Web.
Macrotrends. (2022b). Apple cash on hand 2010-2022 | AAPL. Web.
Porter, J. (2019). Alphabet overtakes Apple to become most cash-rich company. The Verge. Web.
Reddy, N. K. (2020). Advantages and disadvantages of excess of cash for an organization. Chron. Web.
Roisman, E. L. (2021). Statement on the proposed rules regarding 10b5-1 plans. U.S. Securities and Exchange Commission. Web.