As a business grows, it spreads out its wealth until it takes many forms. The value of a company includes its assets such as buildings, equipment, human resources and cash. In financial statements, a cash balance refers to the business's liquid assets that are available to use at any time and for any purpose.
Improved Cash Flow
A large cash balance helps a business manage its cash flow. Even if revenue drops temporarily or is delayed, the business will still have enough cash on hand to meet its obligations such as loan payments and payroll. The large cash balance acts as a buffer and requires less active management, which means financial officers have more time to spend on other tasks.
With a large cash balance, a business doesn't need to borrow money as often. Besides borrowing to make up for cash flow problems, businesses without large cash balances also borrow to make day-to-day purchases. All of this borrowing adds up and costs the business in the form of interest. With a large cash balance, money is available for operational purchases without the need to borrow. Fewer loans and less use of credit cards save money and put the large cash balance to good use.
Video of the Day
In addition to the money it saves, a large cash balance can also be a source of additional revenue for a business by earning interest. In order for the cash balance to remain a liquid asset, it must remain in an account that is always accessible, which limits the amount of interest it can earn. However, even in a standard savings account, a large cash balance can earn interest that adds up to a significant amount of money over time. Compared to the interest a business would otherwise pay to borrow money, the interest it earns on a large, idle cash balance is especially valuable.
The only real disadvantage to a large cash balance is the fact that money in the bank limits a business's ability to grow. While it makes sense for a business to maintain some liquid assets, the rest of its income can usually go to more profitable use by strengthening the company or paying for expansion. Instead of adding to a large cash balance, money can go toward increasing payroll to hire more and better workers, toward paying down debt or into investments that will pay off in the future. A cash balance is more secure but does little to help a business grow until it can be put to use.