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5 reasons why "Cash is King"



The most liquid asset on the Balance Sheet has variety of applications and the associated strategic flexibility makes it one of the most important assets for a firm


1) Organic Growth: Reinvestments into the business in the form of growth capex will lead to capacity expansion and thereby fuel organic growth


2) Funding Acquisitions: If a company is fairly confident about potential synergies through an acquisition it can choose to use cash as a form of payment and mitigate the risk of dilution through equity issuance or additional interest burden through increased leverage exposure


3) Dividend Payment: Cash can be utilized to reward your equity investors in form of dividend payment and thereby build loyal shareholder base, however, this requires consistent payments for a significant time and is not a one time event


4) Operational expenses: Cash can be used to make payments to your suppliers, mandatory salary payments to employees, overheads like electricity and telephone bill payments etc.


5) Debt repayment: In event of excess cash position and availability of prepayment option, it makes sense to make additional debt repayment over and above the mandatory repayment obligations to save interest cost.


On the other hand, sitting on a pile of excess cash and doing nothing with it may not only lead to erosion of investors money but also may rob the firm of organic/inorganic growth opportunities and investor confidence.


Thanks,

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