The prevailing opinion is that companies should deploy idle cash and deposits into investments. However, it is impossible for them to do so without answering the question “What is the optimal level of cash and deposits for our company?" Without defining this, urging firms to invest their surplus funds only sows confusion among management.
When the Global Financial Crisis began, I experienced a crisis as an executive at an asset management company when our assets plummeted to one fifth of their value. If we had lacked internal reserves, we would not have survived. Accordingly, I understand managers who think that holding cash in preparation for a crisis is necessary.
Nevertheless, merely saving funds because there is a possibility of a crisis is not strategy; it is a lack of discipline. Cash levels should be divided into operating cash and cash buffers. Regular funds correspond to operational capital and should remain within a reasonable, common-sense range. The real issue is contingency funds, which should be further divided into crisis-response buffers and investment buffers.
Let me introduce a certain discipline regarding crisis responses. One manager at a Japanese firm said that they want to reserve an amount equivalent to two years’ worth of personnel expenses, for the purpose of retaining human resources and rebuilding the business even in the event of a crisis. The manager said that if they were unable to rebuild the business within two years, it would mean that they were unfit to hold their position. That discipline is striking: it ties the cash buffer to managerial competence.
With regard to investment responses, there are moments in the development of a business where preemptive, large-scale investments are critical. These funds must also be included when making these calculations. Contingency investments exceeding a two-year timeline should be met with considerable skepticism.
Benjamin Graham, one of Warren Buffett’s mentors, warned that if shareholders allow it, management will operate with more capital than necessary. In today’s stock markets, utilizing more than necessary makes these firms the target of aggressive shareholder demands for returns. Boards of directors, as overseers of individual companies, should calculate the appropriate levels of regular funds, contingency funds, and investment funds and review them annually, and allocate excesses based on a priority of growth investment, debt reduction, and shareholder return. Establishing the optimal level of cash and deposits is the starting point of capital allocation—and the board’s core discipline.
>> Original text in Japanese
* Translated by RIETI.
April 10, 2026 - Published in Nihon Keizai Shimbun's "Crossroads"
