Entrepreneurs are using cash as a safety net. With the economy struggling, business leaders are glad they've been hoarding cash. Over the past 20 years, the cash levels of companies with less than $19 million in sales rose to more than 35% of assets from 15%. For the largest companies, the level has doubled to more than 10%.
Kathleen Kahle, associate professor of finance at the Eller School of Management at the University of Arizona in Tucson, AZ, and two other professors studied 13,000 firms of all sizes, finding that all were clinging to cash. Reserves grew particularly fast in the late 1990s and early 2000s, following the bursting of the technology bubble and the September 11 attacks. Being confident you can make payroll and have reduced or no loans or debt is a good thing in today's economic climate.
Small companies are typically less diversified than large companies, and therefore less equipped to handle political and economic storms. "The concern is that it is not clear what the firms will do with the money," says Amy Dittmar, an assistant professor at the University of Michigan here in Ann Arbor.
Source: BusinessWeek SmallBiz, May 2008