Excess Cash Definition & Application Wiki

Excess Cash Definition & Application Wiki

Last Updated by WikiWealth

Short Definition

Cash in excess of what is needed to operate the business. Excess cash is not included in the business valuation, because it does not help in the production of free cash flow. Excess cash works more as a cushion that reduces risk for businesses. A large reserve of excess cash allows a business to avoid the need for debt financing. Excess cash also allows a business to make strategic acquisitions quickly, because cash avoids the use of bank financing, which is another layer of scrutiny.

Excess cash has several disadvantages also. When companies have excess cash, they can be tempted to make value-destroying acquisitions. They could also venture into unprofitable businesses relationships or product lines. Additionally, excess cash is difficult to give back to shareholders, because dividends are taxed and share buybacks may not provide a guaranteed return if the companies stock price is overvalued.

Long Definition

See Academic Resources

Source: http://en.wikipedia.org/wiki/Cash_and_cash_equivalents