When Having Too Much Cash Is a Huge Problem

Big companies have stashed away $1.5 trillion in cash. This isn't good; it's actually really bad. Here's why.
President, Proximo, LLC
March 19, 2013

U.S. companies, especially large technology companies, have a huge problem: their balance sheets are jam-packed with cash—massive mountains of cash that add up to nearly $1.5 trillion nationwide. Large companies started out 2012 putting cash to use via acquisitions and share buybacks, but they slowed down this activity toward the end of the year. Companies with large cash piles are also being very cautious when it comes to borrowing money. Despite their ability to borrow large amounts, they are choosing not to. In just a few years the cash-coverage ratio has increased from 73 percent to 93 percent, meaning that companies aren’t willing to have much debt beyond what they can pay back immediately.

To small-business owners, having too much cash may sound like the best business problem to have. But it isn’t. Just like us, large corporate managers and executives are under tremendous pressure to perform. When they have too much cash on their balance sheets, the pressure grows more intense. Some stockholders want cash dividends. It makes no sense to leave the money in a place where it's earning almost nothing; they would prefer to be paid their corresponding share of the cash to invest elsewhere. Other stockholders want the company to put the money to use via growth strategies. If the company can’t find a good use for the money, then many investors take that as a sign that opportunities for significant growth no longer exist, and the stock price may be poised to decline.  

The lesson for small-business owners is that too much cash, just like too little cash, can be a problem. If your company is starting to amass large amounts of positive cashflow each month, it's best to start devising a strategy for that cash. Once growth opportunities are evaluated, it's best to pick one and proceed. Otherwise pay yourself a dividend. Hoarding cash isn’t a good business strategy.  

[WSJ]

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President, Proximo, LLC