Advantages and weaknesses of the minimum-cash-balance practice
The business is holding on the minimum cash balance practice because first, it maintains a safety net against the unexpected fees or bills that may arise in the course of running the business; for instance, the building repair costs or the expenses of the equipment (Kokemuller, n.d). Second, the practice enables the business to stay out of the debt since payments are made in cash; hence, paying with cash instead of credit helps the business to avoid high accounts payable balances and significant interest payments on debts. Third, maintaining a minimum balance helps the business to seize opportunities that may emerge; for instance, expansion opportunities, or liquidation offers from the suppliers. However, the minimum-cash-balance does not generate much return when held in checking account or cash reserves.
Minimum-cash-balance practices basically means that the business you own or are working for won’t allow its available cash balance to fall below a pre-designated amount (Kokemuller, n.d.). Now it is important to understand some of the advantages which is it provides a safety nets for bills and fees, avoids credit due to not needing to use credit for small term bills, and it helps when it comes to seizing opportunities. This could be when a company has a huge liquidation sale and with your cash on hand you can take advantage of the situation and stock up on needed supplies. With advantages come disadvantages as well. One of the big drawbacks is when saving cash, it takes away your ability to pay off investments more quickly.