What is Cash?
How Does Cash Work?
Although there is some leeway for judgment in particular situations, common examples of cash at the corporate level typically include bank accounts and money funds. Marketable securities and Treasury bills are easily converted into cash and are thus usually called "cash equivalents." The Financial Standards Board requires companies to establish policies concerning which types of short-term, highly liquid are treated as cash equivalents.
Theshows the amount of cash at a given point in time; the statement of cash flows explains the change in cash over time.
Why Does Cash Matter?
The amount of cash a company holds is very important and has implications for the company's overall operating strategy. For instance, companies with high amounts of cash are better able to get through hard times when sales are low or expenses are particularly high. However, companies with a lot of cash on hand are often takeover targets because their excess cash essentially helps buyers finance their purchase.
High cash reserves also could indicate that management has not figured out how to best deploy the cash, but for capital-intensive companies, high cash reserves could signal that the company is "saving up" to make some significant purchases.
It is important to note that there is an opportunity cost to holding cash; that cost is the return on equity that company could have earned by investing the cash in a new product or expanding business.
Many theories exist about how much cash certain kinds of companies should hold, and the current ratio and the quick ratio help investors and analysts compare company cash levels in relation to certain expenses.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
The old adage “You get what you pay for” is one we've heard all our lives, probably since we were first introduced to money....Read More →
Imagine paying off your 30-year fixed mortgage five, 10, or even 15 years early. If you were 30 when you took out your home loan, you could be mortgage-free by 45, freeing up an extra $2,...Read More →