Last week, the Wall Street Journal pointed out that cash reserves in US companies are at the highest levels since 1952. Most of the analysis is focused on the risks in having such high levels of cash earning essentially no return. However, that is the reverse of the way businesses see this. In fact, the real risk is in not having enough cash on hand. Cash reserves provide a strong backbone to companies allowing them to be resilient in the face of economic hazards like another financial meltdown. They also provide the ability to weather weak buying by the public and industrial customers. Finally, they provide flexibility and wherewithal to buy companies or to expand into new markets when competitors are feeling the pinch. This is sound risk management, but even more, it is sound opportunity management.
© 2010 Richard Martin. Reproduction and quotes are permitted with proper attribution.