Given the old and often-repeated adage "cash is king" in business, it might be hard to reconcile the notion that your company could actually have too much cash on hand. However, several practical problems can result when you hold too much cash, including higher borrowing costs.
Unnecessary Interest Payments
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One of the most significant adverse effects of holding excess cash is paying more interest on debt than is necessary. If you have stockpiles of cash and outstanding, high-interest debt balances, you have too much cash on hand. Cash reserves held in a typical low-interest-yield business checking or savings account does little for you. If, for example, you earn 0.3 percent on your cash accounts and you have outstanding debt at 8.0 to 12.0 percent, you could use some of the cash to pay down your debt.
Missed Opportunities
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If you hold onto cash at the expense of investments in new product research and development, business expansion and marketing, you may be missing significant opportunities. All of these types of investments can serve as catalysts for continued growth of your business.
Careless Mistakes
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Excess cash can also put you in a position to make careless mistakes. Preserving cash signifies that you have entered the comfort zone with your operation. Rather than seeking new growth strategies, you may go into the reactive mode in decision-making. With excess cash, it is easy to simply throw money at problems, such as legal fees, maintenance needs and human resources. While investments in these areas are often justified, excess cash may cause leaders to avoid traditional due diligence.
Internal Conflict
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Just as cash can cause greed among individuals, it can lead to tension within an organization. If you operate as a partnership or a corporation, you have multiple leaders with vested interests in strategic decisions. You might experience fights over whether to hold onto cash, reinvest it or distribute earnings to investors. If you opt to hold onto cash, you run the risk that some investors will become fed up with delays in returns on their investments.
