Do you have “World Class Cash”?
Several years ago, I read an article with this title on how much cash the best-run public corporations had as a % of their annual revenue. Unsurprisingly, after setting aside financial institutions, the companies with the most cash were all tech companies, with some carrying close to 50% of their annual revenue in cash.
Current tech companies have cash to annual revenue ratios of 100% plus (they typically operate with high profit margin, so they are generating significant cash, which helps considerably in building cash reserves).
Why wouldn’t they pay off their bond holders, banks, and stockholders? They want flexibility and to minimize risk. Apple has discussed moving towards a Net Cash Neutral position…..holding as much cash as their overall debt. This would position them to mitigate any debt risk while allowing them to move quickly on internal and external growth opportunities as needed.
There are times when you can burn through cash, so having cash reserves is very prudent.
Having cash available allows you to weather downturns, seize opportunities for strategic hiring and acquisitions, purchase equipment and fund new initiatives, reward employees, selectively bless causes and organizations, all without needing approval from anyone outside of the organization.
Cash reserves are a financial “Insurance Policy”.
Here are some cash questions to ponder:
- Do you have cash goals for the next 1-3 years?
- How can you become your own bank?
- What is your plan for improving your cash balance as a % of annual revenue or as a % of your overall corporate debt?
- Increasing Gross Margin and Net Income are keys to generating cash. Have you reviewed your product/service pricing for upside opportunity?
- What opportunities do you have to reduce product/service expenses? Support expenses?
- Are you distributing appropriate cash to shareholders without making the Corporation cash poor?
- Can your corporate debt be restructured to reduce debt-service expenses?
