Cash is the money readily available within an organization to meet short-term obligations. Cash is the most liquid form of current assets. Organizations maintain sufficient cash or cash equivalents, also known as working capital, to run the day-to-day operations of the business. While some organizations struggle to maintain adequate cash for daily operations, some maintain excess cash in anticipation of unknown expenses. Excess cash on the balance sheet has its advantages and disadvantages.
Advantages of Excess Cash in Business
Excess cash on the balance sheet helps an organization manage its cash flow efficiently. The excess cash comes to the rescue if there is a sudden dip in revenue or delays in account receivables. The excess cash ensures that the organization is able to meet its obligations, such as payroll, rent, administration expenses and loan payments, even if it doesn't generate any revenue for a specified period.
New entrepreneurs are encouraged to keep excess cash on hand as a buffer to meet day-to-day obligations in case the onboarding of new clients takes time. The excess cash on the balance sheet ensures that the organization isn't forced to borrow money. Since borrowing costs are high, organizations should maintain some excess cash on hand to avoid taking short-term loans. Excess cash on hand is an indication of the short-term financial well-being of the business.
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Disadvantages of Excess Cash in Business
However, too much cash on the balance sheet is idle cash that doesn't help the organization in any manner. The excess cash could be invested in suitable projects that would generate additional income. By keeping the cash idle, the business loses an opportunity to generate additional returns. Therefore, the major disadvantage of too much cash on hand is that it lowers the return on assets.
Another disadvantage of too much cash on hand is that it increases the cost of capital. According to Corporate Finance Institute, the cost of capital is the minimum rate of return that a business must generate before generating value to shareholders. The excess cash might also make the management team complacent, which increases the risk of damaging the business value.
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Companies With the Largest Cash Reserves in 2020
As reported in Investor's Business Daily, some large-scale organizations in the U.S. have huge cash reserves in 2020. Alphabet leads the pack with net cash of $103.7 billion, followed by Apple with $90 billion. Other organizations that made it to the list of top-10 largest cash reserves in 2020 are Microsoft, Facebook, Cisco Systems, Nvidia and PayPal Holdings. These companies maintain huge net cash in the bank.
How to Deal With Surplus Business Cash
Companies should pay off debt, if there is any, with surplus cash. There is no point in a business paying interest on debt when it has substantial cash reserves unless it anticipates an attractive option for investing the money in the near future. After paying down debt, a business should invest additional surplus cash in expanding the business and procuring additional technologies that improve the efficiency of operations. Excess cash on the balance sheet is good in the short term, but it can cause the organization to lose opportunities that could generate huge returns in the long run.
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