Previous month:
August 2017
Next month:
November 2017

Working capital management - can you ever have too much cash?

I was interested to read an article on East Anglian business website bizeast with the headline "Firms at risk from 'locking up too much cash' ".    What is too much cash?

The article was based on a Lloyds Bank report - Lloyds are pushing a working capital management product.   However if you read the Lloyds page it's clear that its not about having too much cash, but about having too much cash locked up in working capital.  As firms grow, unless you manage things tightly or have a very positive working capital cycle there's usually a suck in of cash as the debtor book and stockholding grow unless fully covered by creditor growth.   So a very misleading headline in bizeast.

Here's the Lloyds link

Art_moneywheelbarrowSo let's assume you manage your working capital tightly - can you still have too much cash?  Well yes sometimes.  Businesses often don't distribute all of their profits, and we see many firms with large cash balances.    This is partly for the "sleep at night" reason of having a cash buffer, and also often because of the high tax rates on dividends.

When you come to sell the company - typically subject to an arguement with the buyer about how much of the cash is surplus (this is where your M&A adviser can really earn their fee) you should expect to be paid £ for £ above the Enterprise Value of the company for any surplus cash.   That's all good.  The only circumstance where surplus cash can be too much cash, is in some circumstances where it's a disproportionaly large component of the price or the balance sheet you might run into trouble claiming Entrepreneurs' Releif.   So yes, in a few circumstances you can have too much cash - and this is where your tax adviser needs to help.

So just to string together a few cliches to finish - cash IS king, the cheapest way to fund your business is good housekeeping (ie working capital maangement) and don't beleive everything you read in the newspapers or on the internet!