Why should I hold cash? A very good question which many people keep asking. It is true of individuals, corporations and funds.
Well cash is held for 3 main purposes (any Economics tutorial 101 will tell you this):
1. Transactions Motive – to do transactions
2. Precautionary Motive – just in case I need something. Just in case…just to protect yourself from emergencies
3. Speculative Motive – some transactions can be done, only if you have cash. If you are a manufacturer of chemicals, suddenly if your supplier offers you extra cash discount for ‘cash’ purchases, you can use cash. Most people forget that this cash is actually cash held for a ‘strategic’ purpose. Suddenly in good times you could find a good deal, and in bad times you could find a good company to buy! Such deals are offerred only in cash. So cash in a sense is a ‘strategic’ asset.
This reminds me of a Panchatantra story.
A Brahmin is going on the road with a calf on his shoulder. 4 thieves who want to take away the calf from him decide to play a trick.
The first thief walks upto the Brahmin and says “hey why are you carrying a pig on your shoulders?” The Brahmin says, this is a calf and walks ahead. Then the 2nd thief walks upto the Brahmin and says “hey why are you carrying a goat?” . The Brahmin retorts, this is a calf. However, now he starts having some doubt. Then the third thief walks up and says “why are you carrying a dog?” The Brahmin looks at the calf and tells the thief – no this is a calf – and walks ahead. However he is now panicking. Then the 4th thief walks up and says “why are you carrying a goat?”.
The Brahmana is at his wits end. He thinks there is something sinister about the animal he is carrying on his shoulders. So he drops the calf and runs away. The thieves pick up the calf and run away.
This is what happens to a CFO who sits on cash. First his MD says “you are holding too much cash”. He argues that if a good strategic deal comes the cash will be useful. Then his MD is grilled on prime time tv by a ‘business analyst’ who says – equity markets have given 35% annualised return in the past 2 months, why are you sitting on cash. The MD (who has been running the business for 22 years, but cannot communicate well in English) is made to look sloppy. Then there are “research reports” which castigate the company for holding “so much of cash”. At last the CFO rationalises “who am I working for” and decides to invest the cash in a real estate project ‘only’ 39 kms from Hyderabad airport with an unknown builder.
Then the slowdown happens, the builder declares bankruptcy, the property is attached, the investors are asked to stand in a queue – and the money is stuck for the next 20 years.
The CFO is like the Brahmin. You know who are the thieves – all those people who have a vested interest in doing a deal with the cash and earn a nice commission.
So cash is like a strategic asset – use it carefully, but leave it in a place where you can lay hands in a jiffy without worrying about market conditions. That is all!
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