Money management by both companies and individual investors is one of the most controversial issues in the world of finance. There are different positions on how to manage cash, each with its respective solid arguments. I am going to try to cover this topic completely in a series of articles that cover the different alternatives of using money. In this first article we will see the importance of monetary management and the different uses of cash.
The importance of proper monetary management
One of the key factors that many of the best investment managers use when selecting investments is the way in which managers manage the money the company makes. Efficient cash management can be a great source of shareholder value, while poor management can be disastrous as it can derail all the effort invested in competing in the market.
Alternatives for using cash in a business
Basically, the company can give 2 different uses to the excess cash generated in the company:
- Retention of cash within the company
- The distribution of money among its shareholders
In turn, each of these uses can have different destinations. The money that the company retains can be used to:
- Store cash for later use
- Investments in the business
- Investments in third companies
Similarly, the money that the company decides to distribute among its shareholders can be used in two basic ways:
- Payment to shareholders in the form of dividends
- Repurchase of treasury shares
What alternative should a company choose in its monetary management?
The answer to this question is simple, although its execution is very complex. Companies must opt for the alternative that provides the greatest value to their shareholders. To do this, you must analyze each of the alternatives and see which of them is more profitable for your shareholders.
In the next articles we will analyze in depth the different alternatives that companies have to use their cash, lessons that we can also apply in the management of our personal savings.