The politicians who complain that businesses are sitting on piles of cash must not know how tight cash flow gets for many small businesses. It is very often the limit to growth, and can be the ultimate cause of the demise of a business. Profits are nice; when they come. But if the cash runs out before the profits roll in, you’re done for.
Big businesses don’t usually like to sit on cash hoards since they can’t earn much on them without making risky investments. However, these are unusual times, and the global banking crises, massive deleveraging, and anti-business policies coming out of Washington, D.C. makes sitting on a pile of cash a good idea.
Ditto when that pile is in a foreign country, and bringing it back to the USA means leaving more than a third of it in Uncle Sam’s coffers. So, no matter how much “jawboning” goes on, the cash hoards will sit there until a reasonable (not too much risk, good return) investment comes along.
Banks are lending, but only to companies that don’t need it—or are virtually certain to have plenty of collateral to back it up. Too many small businesses start to ramp up in volume before projecting out their cash flow needs. It is not that hard to do, but the owner must realize how important a cash flow projection is. Remember, cash is like oxygen; if you run out of it you die.
I’ve also written before (in this space) about the length of the “cash-to-cash” time. Everyone I have ever known underestimates how long it is from when you start spending your cash to when you start collecting it back—in any meaningful quantities.
Bottom line: do your homework on cash needs. Do a cash flow projection out several months or more (depending on the cyclicality of your business). Check you credit lines, and make sure they are both plentiful and really “open to draw on.” I know some small businesses who were ready to fund the “big deal” just about the time the bank pulled back hard on the conditions of their credit line and nearly killed them.
Above all, don’t jump to pay down credit lines (unless you are being pressured to do so) just because you had a good cash flow month or two. You might have a bad one or two (or three or four) and you’ll need all that cash—desperately.
I don’t think this topic warrants any more words than I’ve written here. Cash is KING. Keep as much of it on available as you can—until these tough, uncertain times are over—if that time ever comes. You’ll be happy you did.