Question

discuss the factors that are likely to influence the desired level of cash of a company.
support with references

Answer 1

Factors that are likely to influence the desired level of cash of a company are:

• Credit Policy: A company with aggressive credit policy which allows more time to their customers for payment has to keep more cash with itself to clear its own short term dues. On contrary, companies with conservative cash policy have to keep less cash.   For example: If a company XYZ ltd. moves from 60 days credit policy to 45 days, the desired cash level would get reduced accordingly.
• Type of Business: Companies and firms engaged in manufacturing activities have to keep more cash generally as to meet their day to day obligations for raw material, equipment and other procurements. Service sector companies do not require such enormous amount as they are usually skill based. For example: A firm XYZ engaged in abusiness of shoe manufacturing would require more cash as compared to firm ABC engaged in fintech services.
• Scale of operations: A large scale business requres more cash as compared to a small scale business. For example: If XYZ ltd. plans to set up 2 more new plants, in addition to the existing 2, it would be an expansion of scale of business and more cash would be required to meet the day to day working needs.
• Type of capital structure: A company with more of equity in capital structure does not require much cash. Whereas a company with more debt component would require more cash to pay the interest element. For example: If XYZ ltd. reduces equity and raises 10% debentures, cash requirement would increase to pay that 10% interest.
• Seasonal factors: There may be some inputs that are available only during a particular season of a year. Therefore, the company that needs such inputs may need to have cash reserves for that season of the year. For example: XYZ ltd. having food business may require more food trucks during festive season and less on other days of the year and cash requirement would vary accordingly.