Why should a company maintain a cash reserve?

Maintaining a cash reserve is crucial for a company as it acts as a financial safety net, safeguarding the business against uncertainties and risks that could lead to bankruptcy. Cash reserves enable a company to manage unexpected expenses, economic downturns, or fluctuations in revenue without the need for immediate borrowing or drastic cost-cutting measures.

Having cash available allows a company to sustain its operations during challenging times, ensuring that it can continue to meet its obligations, such as payroll and supplier payments. This financial cushion provides a sense of stability and can also enhance a company's reputation, as creditors and investors may view a well-capitalized company as less risky.

In contrast, maximizing dividends or increasing stock buybacks may provide immediate returns to shareholders but could compromise the company's financial health if it results in insufficient liquidity. Similarly, while investing in real estate opportunities might yield potential returns, it lacks the immediate benefit of protecting the company during downturns. Thus, maintaining a cash reserve is a fundamental strategy for long-term sustainability and risk management.