Cash balance is the state where the company has accessible money, which is not linked to any stocks. Even though they do not usually offer the company sizable returns, they usually have many benefits. The first advantage of a large cash balance is management of its cash flow. It keeps them safe in the time of crisis such as during the 2008 depression. For instance, when the revenue drops, the company still holds enough revenue to meet its obligations. The second advantage is less borrowing from financial institutions. With large cash balances the company do not need to borrow for its activities (Andrén & Jankensgård, 2015) . Companies that lacks large cash balances borrow to meet their objectives, which usually comes with high interests. A good example of a company with a large cash flow is Apple, which has in turn increased their investors. The company’s cash flow has enabled it venture into new areas of business without borrowing such as smart watches and Apple pay. Also, the shareholders of the company have benefitted greatly from large cash balances. The distribution of dividends is high and also the buybacks No doubt, Apply has benefitted greatly from the large cash balance.
On the other hand, large cash balance can be a disadvantage for the company. The first disadvantage is low interest rates, especially because of the low risk. Since the 2008 economic depression, the banks do not usually offer high interest rates for bankers. It is not an additional source of additional revenue when the company puts its large cash reserves. Some company maintain cash as a liquid assets in banks, which means it limits the amount of risk it can earn. Secondly, having a large cash balance limits the company’s growth. The money could be invested elsewhere profits but instead the company chooses to have liquid assets (Noussair & Tucker, 2016) . Even though it is more secure, it does not add value for the company. Companies such as Alphabet and Oracle have large cash reserves that have negative implications in the society. Holding much cash has inflation risk because it withdraws money from circulation. Goods and services will be selling at high prices due to lack of enough cash in the economy. Apart from that by Alphabet and Oracle holding money they increase inequality. Even though they make more profits, it does not reflect the same on the workers. These factors show the disadvantages associated with high cash balances.
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A public trading company with a large cash balance is Apple. The company is American multinational that develops iPhones, iPads, and Mac among other technology devices. Their profit making trend has been on an increasing graph over the last decade. Since 2008 economic depression, the company’s cash reserves as increased drastically. As per January 2018, the company had $245 billion, which was an increase of three percent (Lessambo, 2018) . Even with the high tax associated with the company, the company has invested its finances in various parts of the United States. Recently, they build a campus in Texas with a capacity of 15000 and 5000 employees. The cash balance has varied over the years because of fluctuating spending. According to their balance sheet, there strong cash position is their advantage. They have cash and marketable securities that run into billions of dollars, which is among the highest in the market (Stice, Stice, & Stice, 2017) . They also around $5 billion goodwill that represent their consumer association. However, the company had a low cash balance in the period between 2008 and 2010 due the financial crisis. Since 2011, the company has an increasingly positive cash balances. In fact, it is among the top in the market together with Microsoft.
References
Andrén, N., & Jankensgård, H. (2015). Wall of cash: The investment-cash flow sensitivity when capital becomes abundant. Journal of Banking & Finance , 50 , 204-213.
Lessambo, F. I. (2018). Apple and Microsoft Case Study. In Financial Statements (pp. 331-351). Palgrave Macmillan, Cham.
Noussair, C. N., & Tucker, S. (2016). Cash inflows and bubbles in asset markets with constant fundamental values. Economic Inquiry , 54 (3), 1596-1606.
Stice, D., Stice, E., & Stice, J. (2017). Cash Flow Problems Can Kill Profitable Companies. Available at SSRN 3057698 .
