Recent statistics show that businesses in Canada held $574 billion cash at the end of Q3 in 2012. The amount of cash businesses hold is equal to approximately 1/3 of nominal GDP (32%), which is roughly four times the level in US.
In most cases, businesses hold cash in order to meet financial obligations such as salary, inventories, and debt payments. However, if a firm does not require to use cash within a three-month time frame, it is suggested to invest money to earn a return. Investors prefer firms that can maintain an adequate level of liquidity without compromising normal operations of business. Retaining cash is considered as inefficient use of resources and restrains economic growth.
Reason to high liquidity:
- low interest rate
- uncertainty in equity markets
- funding deficit
- allow flexibility in operations for new ideas and innovations
Companies nowadays use the surplus cash to reduce leverage, which help increase profitability, lower corporate taxes, and debt costs.
Reason to high liquidity:
- low interest rate
- uncertainty in equity markets
- funding deficit
- allow flexibility in operations for new ideas and innovations
Companies nowadays use the surplus cash to reduce leverage, which help increase profitability, lower corporate taxes, and debt costs.