What impact does holding excess cash have for a company?

Holding excess cash allows a company to meet immediate obligations and short-term liabilities readily. This liquidity is crucial for operational stability, as it ensures that the company can cover expenses such as payroll, supplier payments, and other day-to-day costs without delays. Cash on hand enhances the ability to respond to unforeseen circumstances or investment opportunities that may arise suddenly.

While excess cash provides this liquidity advantage, it is essential to consider that it does not necessarily guarantee higher returns, nor does it reduce financial flexibility in the same context—it can actually provide more financial options. Additionally, holding too much cash does not lead to lower liquidity; rather, it is a measure of liquidity itself. Hence, the impact of holding excess cash mainly revolves around the assurance of meeting obligations efficiently.