What can a company do with the extra cash?

Certain businesses have a decent amount of cash in the current times. An inflationary climate isn’t a good idea; however, having money heading into a recession is intelligent. Let’s review the options the typical company has, along with the benefits and drawbacks of each. For this reason, “cash” refers to bank accounts, money market funds, Treasury bills, and other short-term liquid assets.

The context of the discussion is late in 2022 when many economists–including me–are forecasting a recession. Despite some layoff announcements, most companies need help finding the number of workers they want. Supply chain challenges have gotten more accessible, but they remain above average in a variety of sectors. The interest rate is rising and considerably boosting the returns from cash compared to the previous year.

The options for the general categories are to save your cash or pay off debt, purchase inventory, buy assets or give dividends to the owners.

Saving cash is always a wise choice, but it’s not always the best option. It’s beneficial because it gives you options in the future. These could be any of the alternatives mentioned below, with the possibility of a delay. There’s no downside risk when you hold cash. In addition, it allows the opportunity to profit from upside opportunities that could arise shortly. In the face of inflation, the buying ability of money diminishes with time. However, the value of dollars in the assets doesn’t decrease.

Today, unlike in the past few years, the cash is paying back. Treasury bills that are three months in length and secure if there is no collapse of the United States does not collapse pay just a little more than four percent in interest, just like commercial paper. Smaller businesses can get competitive CD rates.

Another alternative is for the company to repay the debt. Most of the time, the bank loan will have more interest than cash can make. There is a significant distinction in the strategic value of paying off the credit line and making early repayments on term debt. Paying down a credit line reduces interest costs and allows you to access the credit line later on. Banks typically view the act of paying down a credit line as an indicator of the strength of their financial position. As cash offers options in an upcoming time, credit cards give the same possibilities.

The process of repaying the term loan is different. In the majority of business loans, fees for early payments will be assessed. In addition, duplicate monthly payments are typically required, and if the company needs cash after a couple of months, it’s likely to be in danger. Most of the time, a better strategy is to put aside the funds to pay down loans in an account that earns interest. The difference between interest expense and the interest earned harms the business; however, it compensates with the ability to have cash in the bank when the situation changes.

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