O'Reilly logo

Strategic Corporate Finance: Applications in Valuation and Capital Structure by Justin Pettit

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

THE COSTS AND BENEFITS OF EXCESS CASH

The costs and benefits of excess cash are highly variable. Though the costs are opportunity costs, they can be quantified. Many of the benefits are strategic in nature and, therefore, difficult to quantify.

Operational and Strategic Benefits

The presence of excess cash and liquidity has more recently become recognized for its advantages by investors, rating agencies, and debt and equity analysts not only in the technology sector, but also in healthcare, industrials, and others.

Cash provides an important buffer against operating volatility and unexpected operating cash flow shortfalls, to lower the probability of financial distress and to ensure self-sufficiency and the ability to invest in growth through difficult quarters. Excess cash balances may be used as a buffer against uninsurable shortfalls.

Cash provides dry powder for acquisitions and other growth investments, which can be important in consolidating industries or for highly acquisitive companies, especially where cash deals predominate.

Enhanced financial strength have other strategic advantages, including competitive advantage against market entrants through a greater ability to engage in aggressive pricing, increased bargaining strength with suppliers from a greater threat of vertical integration or switching, and increased bargaining strength with labor through a greater capacity to sustain prolonged labor action.

Some research suggests that excess cash signals the presence of ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required