Cash Balances: Company Analysis

Introduction

The growth of businesses usually takes many forms. The value of most companies is generally derived from their non-current assets, including buildings and equipment. However, to some companies, the cost is usually calculated from their short-term assets, including cash and human resources. In the financial statements of the different companies, the cash balances typically take the form of the liquid assets of the business that are available at any time for financing short term obligations as and when they fall due.

Before the economic recession, most of the large corporations had invested heavily in the housing market and other long-term investments. Their portfolios had not been well prepared for a global economic recession to occur. The global recession resulted in aa panic among the public, and everyone began to withdraw their funds from the banks. In such an instance, liquidity becomes central to the continuation of the business into the future. The main lesson from the recession was that organizations needed to check their cash balances concerning the amount of debt that they were holding. Enough cash balances would mean that the organization was able to finance their debt obligations when they fall due even during a recession when the revenues and other earnings begun to drop. The paper will analyze the advantage and disadvantages that companies reap from having large cash balances. Furthermore, the paper will identify companies with sizeable amounts of cash and liquid balances and determine why they would continue to increase their cash and liquid investment balances.

Advantages of having large cash balances

Improved cash flow

Substantial cash balanced for the companies helps the businesses typically to manage their cash flows. A temporary drop or a delay in the cash flows of the organization allows the organizations with the significant cash flow balances to meet its obligations that include payments and payroll. The large cash balances provide the organizations with a form of buffer for their immediate debt obligations. Furthermore, the large cash balances require less active management, thus providing the financial officers with more time to complete other essential tasks within the organization.

Less borrowing

Another advantage that is provided by the large cash balances for the organization is that they require less borrowing to finance their obligations. Besides having to borrow funds to finance their cash flow problems, in most instances, the businesses that fail to store large cash balances require to borrow to make purchases for their day to day purchases. All of the borrowings plays a crucial role in adding up the costs that the business incurs in the form of interest paid. With the large cash balances, the organizations enjoy easy access to money that needs to be used for their purchases. Finally, the fewer the loans takes, and the less use of credit cards to save money helps the organizations to place their large cash balances to good use.

Interest

In addition to the money that the organizations save from holding the high values of cash balances, they can be a source of additional revenue for the business through interest earned. For the cash balances to be considered as a liquid, they have to remain as cash at hand or cash at the bank. This means that they are always accessible by the organization as when the funds are needed. Although this limits the amount of interest and earnings that the company makes, the vast cash balances for organizations can still earn them significant amounts of interest over a considerable amount of time. When comparing the interest that the organizations would pay for the loans that they have borrowed, the interest earned by the idle cash would be much valuable.

Disadvantages of having large cash balances

Limited growth

the main shortcoming that the businesses would experience from the large cash balances would be the fact that the cash balances limit the growth of the companies. The while it makes much sense for the organizations to maintain a substantial amount of assets, it would only be viable for the organizations to have a significant amount of their earnings being directed to better and profitable options to strengthen their business or pay for its expansion. Adding the cash balances for the organizations limits the number of funds that are channeled to the future growth and development of the business. Therefore, instead of adding to the earnings and incomes to the large cash balances, the funds can be channeled towards strengthening the payroll by hiring more and better-qualified workers, making future investments, or paying down their debts. Whereas the cash balances are better and provide the businesses with the security of their next ventures, they usually do little to assist in the growth of the company.

Companies with sizable amounts of cash and liquid investments on their balance sheets

The two companies with high amounts of cash and liquid investments on their balance sheet selected for the paper are Microsoft corporation and Berkshire Hathaway Inc. from the financial statements provided for the two corporations, and it is clear that a high volume of their current assets was set aside as cash and liquid investments on their balance sheets. Microsoft corporation has the highest capacity of cash and liquid investments on their balance sheets compared to the total assets set aside. The company has maintained cash and liquid investments, averagely between 76.23% and 83.19% in the last four years. Apple Inc. has also maintained a significantly high amount of cash and liquid investments on its balance sheets that have averaged between 50.48% and 62.83% of the total current assets.

(Yahoo Finance., 2020)

(Yahoo Finance, 2020)

Why a company would continue to increase its cash and liquid investment balances

There are several reasons why companies would continue to increase their cash and liquid investment balances. First, they help to improve the cash flows of the organizations while ensuring that the companies engage in fewer borrowings for their businesses. Furthermore, the holding of the funds allows the companies to earn interest. However, the main reason why large corporations continue to increase the cash and liquid investment balances is to allow them to take advantage of market pullbacks that may be experienced in the economy, allowing them to pick up assets in the form of mergers and acquisitions (Stevens, 2019). Anticipating a market wave such as the one experienced during the global financial recession may provide the corporations with an opportunity to invest the funds in expansion activities such as the acquisition of the companies that are worst hit by the wave. Finally, the companies may use the cash and liquid investment balances for a repurchase program for their company shares.

References

Stevens, P. (2019, November 7). Here are the ten companies with the most cash on hand. Retrieved from CNBC: https://www.cnbc.com/2019/11/07/microsoft-apple-and-alphabet-are-sitting-on-more-than-100-billion-in-cash.html

Yahoo Finance. (2020). Apple Inc. (AAPL). Retrieved from Yahoo Finance: https://finance.yahoo.com/quote/AAPL/balance-sheet?p=AAPL

Yahoo Finance. (2020). Microsoft Corporation (MSFT). Retrieved from Yahoo Finance. : https://finance.yahoo.com/quote/MSFT/balance-sheet?p=MSFT