What is the recommended action to take with a long-term surplus of cash?

When a business finds itself with a long-term surplus of cash, the most strategic decision is to invest that surplus in longer-term projects or return the funds as dividends to shareholders. This approach ensures that the cash is put to productive use, potentially generating higher returns over an extended period.

Investing in longer-term projects can lead to business growth, expansion, and the development of new products, which is essential for sustainability and increased profitability. Such investments often have the potential for greater returns compared to simply holding onto cash or pursuing short-term projects that may not align with the company’s long-term strategy.

Alternatively, returning excess cash to shareholders in the form of dividends can enhance shareholder value and attract and retain investors. This decision signals to the market that the company is financially healthy and capable of providing returns on investment, thereby improving investor confidence.

While holding cash in reserve may maintain liquidity, it does not leverage the company’s resources for growth or return value to stakeholders. Similarly, using the cash for operational expenses often does not capitalize on the opportunity for investment returns and may neglect strategic growth plans. Thus, investing in longer-term projects or returning excess cash as dividends is generally viewed as a more effective approach.