Is there such a thing as too much cash?

Do you have more cash in your business than you know how to handle?

Does it feel safer to keep extra cash on the books than put it to good use?

If you’re fortunate enough to have the “good problem” of too much cash in your agency, you need a plan to keep some cash reserve without missing out on opportunities.

An older Harvard Business Review article asks this question in the context of major corporations. Specifically discussing pharmaceutical giant Pfizer, the author argues that knowledge-intensive companies need to invest in their intangible assets, such as patents, trademarks, and other proprietary creations, requiring significant cash reserves.

Intangible assets usually have a much more volatile market value. That value depends on the ability and willingness of the company to continue investing in new research and development. And because intangible assets cannot quickly be sold or scrapped for spare parts like equipment and machinery, they cannot serve as debt collateral.

This analysis has a good lesson for creative agency owners:

Your company’s primary asset, its brand (an intangible asset), while incredibly valuable to you, has relatively little to no market value.

That is not to say your company isn’t worth a lot to you, or that it can’t be worth a lot more to the market someday. But today, it’s probably not worth anything near the value of the sweat equity you’ve put into it.

Because of that, financing opportunities are both expensive and few and far between. You may be able to sign up for a corporate credit card, backed by a personal guarantee, with a limit that could handle 1–2 months of expenses. Sure, the rewards seem nice, but the annual fees and finance charges make these inappropriate for financing operations.

If your company hits hard times, it will survive only because it keeps sufficient cash in reserve. But how much is adequate? Check out an earlier post on calculating your cash reserve.

But what about keeping more than a sufficient reserve? How much becomes too much?

You’re holding onto too much cash when the opportunity cost of that cash exceeds your expected need in a downturn.

That’s a fancy way of saying you need to use some cash when you have a better way of using it than planning for the worst. In other words, ask if you could put the money to better use than acting as a reserve.

Losing out on that better use—missing out on an opportunity due to fear of the unknown—is an actual cost to you and your business, even if you never see it on a profit and loss statement.

So let me know…

Do you have the fortune of sitting on too much undeployed cash?

Have you determined how much of a reserve you need?

If you were forced to spend half of your cash reserve right now, what is the first thing you would do?

Hit REPLY and tell me about it!