Question

Why would a company want a minimum cash balance? Suppose that the minimum cash balance is $1,000 and that the projected cash surplus is $500. What would a company have to do to achieve the desired minimum?

Answer 1

Companies maintain a minimum cash balance for liquidity purposes, to cover short-term obligations and unforeseen expenses. If a company's cash surplus is below this minimum, it must find ways to increase its cash position, such as boosting revenue, cutting expenses, or obtaining financing.

Step-by-step explanation:

A company would want a minimum cash balance for liquidity purposes, ensuring they have enough cash on hand for unforeseen expenses or to cover short-term obligations without having to liquidate other assets, which might be costly or time-consuming. If a company's projected cash surplus is $500, but they have a requirement to maintain a minimum cash balance of $1,000, they would need to acquire an additional $500 to meet this requirement.

To achieve the desired minimum, a company would have several options:

• Increase revenue by boosting sales or prices.
• Decrease expenses to save more cash.
• Secure short-term financing like a loan.
• Sell non-essential assets.

The selection of these actions would depend on the firm's overall financial strategy and market conditions. Balancing the need for a cash buffer while still investing in growth opportunities is essential for sound financial health.