Describe some uses of excess cash. What will be an ideal response?

Describe some uses of excess cash.

What will be an ideal response?

ANSWER

Answer: If the excess cash is not needed to cover future cash deficits, then it can be used to pay down, or “retire” current debt. Another option is to give the cash back to the owners via dividend payments. Excess cash can also be used to replace aging assets. Here again, the management of the timing of replacement comes into play. When cash flow is tight, maintenance and replacement are often extended. On the other hand, when cash flow is abundant, replacement and maintenance programs can be completed at a faster pace. Ultimately, the speed of replacement and the maintenance of assets are both a function of cash available and the operating needs of the company. Finally, excess cash can be used to invest in the growth of the company. Growth in the firm through its profits can be very beneficial to owners as their wealth increases without additional contributions to the company.