Why having too much cash isn’t always a good thing

CraigGeneral

“Too much cash isn’t always a good thing”. It sounds impossible. Improbable. Incomprehensible. Especially for an accountant to say. Businesses love cash, but is there such a thing as having too much?

While it may seem counterintuitive to ‘suffer’ from having cash, the risks can be overlooked, offsetting the benefit of accumulating it in the first place.

Why cash isn’t always flash

High levels of cash can be a sign of impending danger. If cash is a common feature on your balance sheet, investors will ask why the money is not being put to use. Reinvesting money into your business is a vital strategy for growth.

The opportunity cost of having cash is the difference between interest earned on holding it and the price paid for having the cash invested elsewhere. For example: if you can get 20% return on equity investing in a new project or by expanding the business, what is the cost associated with keeping the cash in the bank, where you are probably only earning 3-4%?

Cash-rich businesses can also run the risk of being careless. Bad habits start to creep in like; inadequate control of spending and an unwillingness to continually to trim expenses. Large cash holdings can also reduce the pressure to perform and complacency can occur. Finally, it presents opportunities for employees to ‘skim off the top’.

Planning considerations

I’m flush with cash. What next?

If you have excess cash, your accountant should discuss your options from a tax point of view. After your options are reviewed the advice of a financial planner should also be obtained. 542 have a number of financial planners on our referral panel and depending on the client and their circumstances would recommend accordingly.

Final thought

To play it safe, business owners should consult their accountants and financial planners carefully. To work out an appropriate cash level, review future cash flows, business cycles, capital expenditure plans, emerging liability payments and other cash needs.

Do you know the appropriate cash level for your business?

Talk to us to arrange a time.

 

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