Companies generally try to maintain a balance between profit (ROI) and liquidity. They need access to cash in order to take immediate advantage of opportunities, to get some vendor discounts in a tight economy, and to provide for contingencies in the currently volatile capital, political and regulatory markets. When banks fail to infuse the system with cash (because they are now avoiding the credit and lending businesses and are staying as liquid as possible, giant bonuses to executives notwithstanding), and they become much more interested in non-interest, transaction-based fee income, companies sit on their cash. They are not hoarding. They are self-banking.
While this has become the practice of large corporations over this past year and a half, it might be practical for small- to middle-sized organizations to develop formulas where cash balances, even in small increments, are accumulated. There is no one-size-fits all formula or appropriate liquidity ratio for every business, but as cash becomes tight, it becomes a wonderful negotiating tool. Give this serious consideration. At this moment, cash, even US Dollars, can purchase amazing bargains. But to participate in this opportunistic auction, you have to have your checkbook at the ready.
A prudent action at this moment in time might well be for senior management to carefully evaluate your company's three most fundamental options:
1) To invest in itself to reap a direct gain, where you have purchase or investment opportunities which can grow your market size or marketshare;
2) To invest in financial instruments... as a passive participant in the successes or failures of others, and to be exposed to the vagaries of unprecedented market volatility;
3) To accumulate a war chest of cash. The less that the banks are willing to lend, the more that cash may be worth to you; both to take advantage of distress sales and arbitrage opportunities, and to have a "cash cushion" in the event of company trauma.
Following is an excerpt from an article in the American Express Open Forum, written by John Mariotti, which will reinforce the "cash is king" strategy that has supplanted the "credit is critical" mindset that caused so many persons and enterprises to overextend themselves tragically.
Douglas E Castle [About Douglas Castle - Blog]
You might want to forward this entire InfoSphere Business Alert [http://InfoSphereBusinessAlerts.blogspot.com] to your peers, to your board, and to your colleagues.
Cash IS Still King
John Mariotti Small Business Trends: October 5, 2011The politicians who complain that businesses are sitting on piles of cash must not know how tight cash flow gets for many small businesses. It is very often the limit to growth, and can be the ultimate cause of the demise of a business. Profits are nice; when they come. But if the cash runs out before the profits roll in, you’re done for.
Big businesses don’t usually like to sit on cash hoards since they can’t earn much on them without making risky investments. However, these are unusual times, and the global banking crises, massive deleveraging, and anti-business policies coming out of Washington, D.C. makes sitting on a pile of cash a good idea.
Ditto when that pile is in a foreign country, and bringing it back to the USA means leaving more than a third of it in Uncle Sam’s coffers. So, no matter how much “jawboning” goes on, the cash hoards will sit there until a reasonable (not too much risk, good return) investment comes along. [read entire article]