Question

How has technology changed the way target cash balances are set.

Answer 1

The target cash balance describes the ideal level of cash that a company wishes to hold in reserve at any given point in time. This figure hopes to strike a balance between the investment opportunity costs of holding too much cash and the balance sheet costs of holding too little. Companies with excess cash on hand may be missing out on investment opportunities, while companies that are cash poor can often be forced to make otherwise undesirable transactions to free up more operating capital.

The target cash balance is often part of a larger investment or business strategy. Various industries will maintain different target cash balances depending on where the economy is at on different points in the market cycle. For instance, when technology is hot, larger tech players will maintain a healthy cash reserve for acquisitions. In contrast, retailers may be experiencing a lean period and will operate with target cash balance below normal levels.

As everything has merits and demerits and advantages and disadvantages, technology has also the same impact on target cash balances. Those who are in the tech field will maintain higher target cash balance than others when there is higher growth in technology. When the impact of technology is low, the tech field maintain lower target cash balance than other traders