Planning Optimal From the Firm Value Creation Perspective Levels of Operating Cash Investments

TL;DR

This paper explores how optimal levels of operating cash investments, considering risk and firm value creation, can enhance liquidity management strategies for better corporate valuation.

Contribution

It introduces propositions for setting optimal precautionary and speculative cash balances to improve decision-making in cash management for value maximization.

Findings

Relations between cash balances and risk are analyzed.

Propositions for optimal cash balance levels are proposed.

Guidelines for managers to maximize firm value are provided.

Abstract

The basic financial purpose of corporation is creation of its value. Liquidity management should also contribute to realization of this fundamental aim. Many of the current asset management models that are found in financial management literature assume book profit maximization as the basic financial purpose. These book profit based models could be lacking in what relates to another aim like maximization of enterprise value. The corporate value creation strategy is executed with a focus on risk and uncertainty. Firms hold cash for a variety of reasons. Generally, cash balances held in a firm can be called considered, precautionary, speculative, transactional and intentional. The first are the result of management anxieties. Managers fear the negative part of the risk and hold cash to hedge against it. Second, cash balances are held to use chances that are created by the positive part of the risk equation. Next, cash balances are the result of the operating needs of the firm. In this article, we analyze the relation between these types of cash balances and risk. This article presents the discussion about relations between firm net working investment policy and as result operating cash balances and firm value. This article also contains propositions for marking levels of precautionary cash balances and speculative cash balances. Application of these propositions should help managers to make better decisions to maximize the value of a firm.