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Thursday, July 7, 2011

Finance and Management - 7

In the earlier blog, we had a brief explanation of what the various heads in the Balance sheet meant. We would keep explaining some of the additional heads as we progress with the blogs.

As a manager it is important to understand the way an investor would look at the various components on the balance sheet. So we begin understanding this over the next few blogs.

In business “cash is king” - it the most liquid format of assets and can be easily converted for a variety of purposes. A good reserve of cash shown in the Balance sheet would attract a lot of the investors towards such a company. They would believe cash would offer some protection against the sluggish times that are common in the economic cycles; also, the extra cash could be used for exploring new options for growth.

A company that is performing consistently would generally have a healthy cash reserve, this is an indication that the company has been performing well - The management is short of time to really utilize the accumulating money! The opposite of cash in surplus, i.e. if the cash is found to fast dwindling then this is sign of serious trouble.

If the cash accumulation over a long period is not used up for productive purposes, the question of the effectiveness of management could also arise. The reason management has allowed such accumlation, could be lack of good investment opportunities.

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