Question

Discuss why a company might have large cash holdings. Discuss why a company should not have large cash holdings.

Answer 1

A co might have large cash holdings because of high volume of cash which is not banked into daily. it might also be because the company might have higher degree of outstanding expenses at the year end which are not yet paid even though it has sufficient cash. Or the Company might have a new project in hand which requires a Substancial cash outlay, so it might have kept the cash to fund such outgo.

A co should not have large cash holdings since it might affect its Liquidity Ratio(Current Ratio,Acid Test Ratio) since these should be ideal. They should be neither too high & nor too Low as a higher ratio indicated that the company does not have any suitable short ventures where such cash can be invested in. This indirectly reflects misuse of cash resources of the company