Thesis work paper Cash Reserves

Keep Cash Reserves at a Minimum of Eight Months
Davidson (Davidson, 2001) also suggests that software firms should not go lower than six months cash flow, as any product launches will increase expenses when money is already tight. This plus the fact that it could take another three to six months to find, interest and negotiate with potential investors does not leave much time for the firm operate in, especially during industry downturns or recessions.
Accordingly, Blumling (Blumling et al., 2002) points out that a firms management credibility is normally damaged unless the team has been changed and turnaround manager appointed.
“To put all this right, a company must give a turnaround team the power to act fast. First, the board of directors should decide whether the current CEO (who often has an entrepreneurial mind-set) might have forfeited the respect of customers, investors, and employees….” (Blumling et al., 2002).
Due to the constraint of finding and hiring a turnaround manager, assembling a turnaround team and going through the removal of senior managers, it is highly unlikely that this scenario alone will leave six months for the turnaround manager to seek funding and have time to implement a turnaround. As such, it would seem prudent to begin looking for the turnaround manager when eight months cash flow is left.
This argument is supported by the large cash holdings of many successful software companies. Adobe for example currently holds cash, cash equivalents and short term investments of US$1.1 billion (See Appendix A), while Intuit also keeps US$1.26 (See Appendix B) on hand. Cash reserves seem to be part of normal business planning (Davidson, 2001), despite critiques from industry analysts, that these should be invested elsewhere or returned to shareholders.
Like all turnarounds denial of the firms current predicament can exist, but fortunately the “burn rate” in software industries is sufficiently high to mean that getting both management and staff involved in the turnaround is normally easier. Failures therefore occur because of insufficient capital, lack of new products, poor strategic positioning and inadequate cost cutting.