Question

Is it possible for a firm to have too much cash?

Why would shareholders care if a firm accumulates large amounts of cash?

What options are available to a firm if it believes it has too much cash?

How about too little?

Answer 1

Yes it is possible for a company to have too much cash, usually the firms which deals with end consumers mostly have more cash in hand.

Share holders are really concerned about the cash being held in the company since such cash doesn't produce any return to the company nor to the shareholders having more cash with the company indicates '' Lazy management of the company''

A firm can invest in R&D or in invest in some high yielding investments or it can also invest in new projects, if any option is not available at the disposal then the last resort is to pay the investors so that they can invest else where.

Having too little is also a problem for a firm because it might face liquidity crunch.

Example : Microsoft has a largest cash pile of $ 136.6 Billion followed by Google and Apple

If Microsoft holds more cash with the company in the form of cash reserves or in the short term investments or with the bank, then there is no point in doing the business an investor can also do the same.

Being a business entity Its focus should be on doing and expanding its horizons in its field but not to held cash with the company.

If Microsoft does not re invest in business or in R&D may be few years down the line google will take over the microsoft postion.

The other way around If the company does not have enough cash reserves it will be difficult for it to operate day to day business operatons which can jeopardise the long run sustainabiliy of the company