When your company has a lot of cash, that can be good for you. In a sluggish or choppy economy, having cash on hand provides a sense of security. However, hoarding cash creates many drawbacks for companies that tend to negatively affect the economy, which, in turn, can affect companies.
Companies that do not invest their cash in income-producing assets do not grow. While a stagnant company can survive for a while, it becomes vulnerable to competitors who spend their cash to improve product offerings, market more effectively and increase profits. Sitting on cash can keep you safe, but it can't keep you going.
Keeping cash in an interest-bearing account makes very little money, especially when compared to what it could be making for a company. Stakeholders and shareholders may become impatient with a company that does not put its cash to work building income and profits. The small returns from interest do not compare to the returns a company can realize from expanding, purchasing new equipment or paying for a marketing initiative.
Companies that don't order raw materials, supplies and products soon wear out their supply chain. Suppliers can go out of business because their income drops. Instead, companies can negotiate for discounts on supplies if they pay their invoices early. This keeps their suppliers in business and creates a positive return on the cash that can beat returns from a money market fund.
Austerity drains the economy. Companies that hoard cash and don't spend on growth tend to create a downward spiral in local, regional and national economies. This means fewer customers as people start hoarding their remaining cash the same way the company does. By keeping your business growing and spending, you help create customers for yourself.
