Can you have too much cash on your balance sheet?

I once read that it is just as harmful to get too much sleep as it is to be sleep-deprived. It doesn’t seem possible. It’s the same with having too much cash. Cash flow is a topic that causes anxiety and sleepless nights for most managers and business owners. So while it seems counter-intuitive, it’s true that you can have too much cash on hand. Here’s why:

1. 1. 1. Cash isn’t free. It has a cost, hence the term “cost of capital.” Borrowed money has interest. Equity investors expect a return for providing capital to the company. Cash needs to be invested so it’s earning in excess of the cost of capital.
      2. Cash is a non-productive asset. There is an opportunity cost to keeping cash in the bank when it could be used to grow your company’s profits and provide a return on capital.  Investing in marketing, fixed assets, employees, acquisitions, equipment, inventory, and innovation are all good ways of using your cash to benefit your company’s financial health.
      3. In the current low interest rate environment, keeping cash in your bank account is like putting it under your mattress. Interest rates on savings accounts aren’t even keeping up with inflation.

Of course, you need to have enough cash on hand to meet your obligations. Cash is the oxygen of the business; it can’t survive without it.

Ideally, you could project the minimum amount of cash you need to have on hand and invest the remainder. This is not an easy task, but with a bit of analysis, the right tools, and some practice, you can find ways to better use cash to your company’s advantage.

Projecting the optimal amount of cash to have on hand at any time is part art, part science. The minimum amount of cash you need fluctuates with your business cycle and seasonality. As a general rule of thumb, 3 to 6 months of operating expenses is a good benchmark. Excel is a good tool to help you project your future operating expenses on a rolling basis. The more precise you can be in your predictions will help you grow your business by investing the maximum amount and not risk running out of cash.

If you are ready to graduate from doing cash flow forecasting in Excel, there are many software solutions available to help you project better data more confidently. We recommend one that integrates with your accounting software because it pulls your actual historical data and up to date cash balances. Sage Intacct and NetSuite are accounting software packages that have built-in cash flow modules. Top rated programs that integrate with QuickBooks include Float, Cash Flow Frog, Dryrun, and CashFlowTool. The beauty of these programs is the ability to play around with what-if scenarios and sensitivity analysis to help plan for fluctuations in cash balances.

A quote from Seinfeld:

“People always tell me ‘You should have your money work for you.’ I decided, I’ll do the work. I’m gonna let the money relax.”

If you want to grow your business, you can’t let your money relax. You need a strategic plan.

ABOUT JUNA FINANCIAL SOLUTIONS

Need help determining how much cash is optimal, or help with projections? Contact us at Juna to find out how we can help. info@junafinancial.com.