What is a war chest?
The phrase “war chest” refers to the financial reserves that a firm accumulates or sets aside to capitalize on unforeseen opportunities. A war chest may serve as a safety net against unfavorable occurrences during uncertain times, even if it is usually used to purchase other firms or corporations. A war fund is frequently allocated to ephemeral assets, such as demand-accessible bank deposits and Treasury bills.
Understanding
Sometimes, it is thought that excessively building up a war chest is an ineffective use of resources. Investors may be prepared to overlook a firm with a large cash hoard for a while. Still, if the cash balance keeps rising considerably over the company’s typical operational needs, investors could beg for a piece of the company’s wealth.
A portion of the company’s cash holdings may be distributed to shareholders if it needs help to use its war chest effectively. Usually, one of three methods is used to provide this kind of return on capital to shareholders: share buybacks, special dividend distributions, or dividend increases.
Particular Points to Remember
However, businesses may use debt rather than cash to finance acquisitions or cover unforeseen costs. This enables enterprises to carry less money, mainly if financing is available. Conversely, companies often use special dividends or buybacks to re-distribute their stock to shareholders.
Types
A war chest’s foundational components are cash and its liquid equivalent. Companies have been adding more intangible assets to their war chests lately. These intangibles might include human, political, and social capital, helpful in initiating or repelling a corporate assault.
Corporate entities’ warchests will change depending on their nations, sectors, and business models. No two are the same, in a way.
Another word used in business is “war room.” Companies frequently put together, or allude to, a “war room,” where senior executives convene to strategize and create high-profile initiatives. The newest communications, video, and audio developments will be found in modern war rooms.
Illustrations of War Chests
Cash reserves are utilized to finance investments and purchases. An indication of a firm’s near-term prospects may be obtained by examining how they vary over time.
The media and analysts often highlight Apple’s (AAPL) cash hoard and war chest. As of June 30, 2022, Apple’s cash on hand was $27.5 billion, compared to $35 billion the previous year.1. Following investor opposition, the corporation began repurchasing shares and disbursing dividends to use a portion of its cash reserves.
Berkshire Hathaway, owned by Warren Buffett, is another example of a war chest that is closely monitored (BRK-B). As of June 30, 2022, the company’s cash was $26.5 billion, compared to almost $85 billion at the end of 2021.3. Analysts keep an eye on Buffett’s cash holdings and make predictions about the firms he could acquire. The notable decline over the last six months indicates Berkshire’s stock-buying binge during declining markets, which included a sizable investment in Occidental Petroleum (OXY).4 Why do firms build up war chests?
War chests are large sums of money that a business sets aside. These may provide a safety net against economic downturns or help make big purchases or investments when the right opportunity presents itself. A corporation with a war chest may wait for the appropriate moment to seize these chances. Another way to stave off an adversarial takeover is by amassing a sizable war fund.
What Goes Into a Company’s War Chest?
Quickly accessible liquid assets like cash and cash equivalents, bank deposits, and Treasury bills are kept in a war chest.
Where Did the Name “War Chest” Originate?
The word “war chest” originates in medieval military jargon, when it denotes a person’s private stash of armor and weapons stored in their house (in a chest), ready for deployment in the event of hostilities.
Conclusion
- A war chest is an accumulation of cash a business keeps for unforeseen expenses or acquisitions.
- Usually, war chest funds are allocated to temporary ventures that are readily available for use.
- On the other hand, a war chest that is too large may sometimes be an ineffective method of allocating resources.
- Apple is one example where experts and investors have suggested the company’s big war fund is a questionable use of cash.
