What is ‘Target Cash Balance’
The ideal amount of cash that a company wishes to hold in reserve at any given point in time. This figure hopes to strike a balance between the investment opportunity costs of holding too much cash and the balance sheet costs of holding too little. Companies with excess cash on hand may be missing out on investment opportunities, while companies that are cash poor can often be forced to make otherwise undesirable transactions to free up more operating capital.
Explaining ‘Target Cash Balance’
It is wise for individual investors to set their own target cash balance as well. Through portfolio management and clearly defined financial goals, investors can at least approximate what percentage of their holdings should be in cash to avoid the pitfalls listed above.
Target Cash Balance FAQ
What is a company’s cash balance?
Cash balance is the amount currently accessible. It’s gotten by the addition of the cash balance of the previous month to the cash flow of the current month — therefore subtraction if there’s a negative cash flow. Your cash balance should never be negative.
Is cash balance an asset?
Cash is a current asset on the balance sheet, and thus increased on the debit side and decreased on the credit side. Cash appears first in the current asset section of the balance sheet because they are arranged in order of liquidity.
What is minimum cash balance?
Definition. A minimum cash balance helps companies avoid cash shortages which happens when the cash leaving is more than the cash entering within a given accounting period. It is the least amount of cash currently accessible to a company for cash maintenance and planning objectives.
What is a target balance?
A target cash balance is the cash that a company should have in reserve at any time. This amount is chosen to balance the opportunity costs of holding excessive cash and the balance sheet costs of holding insufficient cash.
What is a cash balance benefit?
The Cash Balance Benefit Program is a hybrid retirement program that can be used instead of the CalSTRS Defined Benefit Program, Social Security and other retirement plans. The dollars donated by the employee and the employer plus interest is accumulated, just like a defined contribution program.
How does a cash balance plan work?
For a cash balance plan, the account of a participant credits yearly with a “pay credit” (like a 5% compensation from his or her employer) and an “interest credit” (either a fixed rate or a variable rate that is linked to an index such as the one-year treasury bill rate).
Further Reading
- Managing target the cash balance in construction firms using a fuzzy regression approach – www.worldscientific.com [PDF]
- Cash holdings in SMEs: speed of adjustment, growth and financing – link.springer.com [PDF]
- The determinants of target cash holdings and adjustment speeds: An empirical analysis of Chinese firms – papers.ssrn.com [PDF]
- The combined effects of free cash flow and financial slack on bidder and target stock returns – www.jstor.org [PDF]
- The role of cash holdings in reducing investment–cash flow sensitivity: Evidence from a financial crisis period in an emerging market – www.sciencedirect.com [PDF]
- Corporate Governance, Ultimate Owner, and Target Cash Holdings: Evidence From China – journals.sagepub.com [PDF]
- On the determinants of SME cash holdings: Evidence from Spain – onlinelibrary.wiley.com [PDF]
- An empirical analysis of the determinants of the cash conversion cycle in Kenyan listed non-financial firms – www.emerald.com [PDF]
