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Cash is critical, to a point
Cash is critical, to a point. Operating with minimum
cash is a skill few companies have, and even fewer CFO’s have the stomach
for. Rumor has it that as Enron failed, their financial team had no idea how
much cash they had in the bank and how much their liabilities were. It’s
scary.
Many companies, moreover, are run by using their
banks’ availability figures (available but unused credit lines) as their
cash.
Insofar as investors are concerned, too little cash
(and borrowing capacity) limits growth opportunities. This can create
bottlenecks in accounting and operational departments; and can lower moral.
Too much cash, on the other hand, can invite
unwelcome suitors, resulting in a significant loss of future profits for
current shareholders. Owning stock in a company that becomes a buyout target
is not necessarily a good thing. While the short-term increase in stock
price is appreciated, good investments are hard to come by, and many may be
unable to be replaced. Unwelcome suitors normally try to benefit at the
expense of the old shareholders. Potential profits can be transferred from
existing shareholders to the new unwelcome buyers. The suitors, In effect,
are taking profits that should have belonged to the old shareholders.
Cash, therefore, is relevant depending on which side
of the transaction you are on.
Next review information on:
Window Dressing
Cash Gap
Cash Per Share
Burning Rate
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