Importance of Cash, Research Paper Example

Organizations hold cash on hand or in banks because cash is the most liquid of all assets. Organizations need cash to manage their day-to-day operations. While profits are important, they are not everything. Profits and cash reserves are two different things (FindLaw) and organizations can still go out of business even if they are extremely profitable due to lack of liquidity. This is because accounting rules allow profits to be recognized when transactions take place even if the actual receipt of cash may occur later. Thus, cash is important for the firms to survive and prosper (Constand).

Cash is especially important during tough economic times when revenues may be declining. Good liquidity position also enables organizations to enjoy favorable terms should they seek debt financing from banks and other lending institutions. This is because lending institutions are interested in the applicants’ ability meet principal and interest payments obligations. Huge cash reserves may also mean the organizations won’t need external financial and, thus, could avoid financial leverage and interest payments which have a negative impact on operating profitability.

Cash is especially important for organizations in their early years of operations because it is not uncommon to incur losses but sufficient cash reserves ensure that the organizations do not go out of business. Cash is also important to new businesses because they have yet to build their credit history and many lending institutions are either reluctant to lend to new businesses or do so at high interest rates. Cash also helps organizations to maintain good relationships with their suppliers by making timely payments and may even enable the organizations to take advantage of discounts for prompt payments.

References

Constand, Richard. Importance of Cash Flows. 18 September 2012 <http://uwf.edu/rconstand/5994content2003/T1-Overview/T1-OverviewP03.htm>.

FindLaw. The Importance of Cash Management. 2 April 2009. 18 September 2012 <http://www.reuters.com/article/2009/04/02/businesspropicks-us-findlaw-importance-o-idUSTRE5313U120090402>.