Even before the global financial crisis struck in 2008, corporate coffers were bulging with cash, opening companies to criticism for not putting the money to work. But following the collapse of the credit markets and the on-set of the worst recession since the Great Depression, anxious CFOs put a premium on liquidity and safety, building "fortress" balance sheets that could withstand any financial shock. It was a sensible strategy. After all, as then-president of the National Association of Corporate Treasurers Edward Liebert noted in June 2009, "You can miss your earnings targets and survive, but you can only run out of cash once."

Today, Corporate America appears in no danger of that. In fact, it has more cash on hand than ever. According to the Federal Reserve, nonfinancial companies held $1.8 trillion in cash and other short-term assets at the end of March — up 26% from a year ago, the largest increase since the Fed began keeping records in 1952. Cash now accounts for 7% of company assets, the highest level in nearly 50 years.

An analysis by CFO magazine shows that nonfinancial firms in the S&P 500 had $939 billion of cash and short-term investments at the end of 2009, also up 26% from 2008. Cash as a percentage of sales was 13%, the highest level in more than 10 years. Meanwhile, the CFO Midcap 1500 (companies with annual sales of $100 million to $1 billion) collectively held $111 billion in cash, up 15% from 2008. At the same time, year-end current liabilities fell 8% for the CFO Midcap 1500 and 9% for the S&P 500.

Now that the recession is fading, why are companies still accumulating greenbacks instead of plowing them back into the business or putting them in shareholders' pockets? "There's so much uncertainty about the value of investing, and clear and present dangers from increasing regulation and taxes," answers David Hirshleifer, professor of finance at the University of California, Irvine. "There's a high value to having financial slack so that if the firm hits bad times it will still be able to fund internal operations and take positive [net present value] projects," he adds.

At a time when suspicion of counterparties is prevalent, hoarding cash also makes commercial sense. "It helps us win deals, especially when partnerships can run as long as seven years," says Mohit Bhatia, CFO of Genpact, a finance and accounting process management firm. "Clients and prospects are very keen to deal with companies with ample liquidity."

Big cash hoards also help companies avoid having lenders peering over their shoulders and hamstringing them with covenants. Cash and a debt-free balance sheet enable Cree Inc., a maker of light-emitting diodes (LEDs), to grow without restrictions from lenders, says CFO John Kurtzweil. Without the liquidity, he says, "if I wanted to add a factory I would have to renegotiate with bank groups, and they would take a pound of flesh out of me."

Add to that the drying up of bond markets and high volatility in equities, and holding on to your cash seems highly responsible. "No one asked me once last year whether we would make it through the recession," says David Goulden, CFO of EMC, which had $10.2 billion of cash on its balance sheet against only $3.1 billion of low-interest debt at the end of its first-quarter. "The important thing is that we have lots of cash because we generate lots of cash."

The Case Against Cash
But keeping cash on the balance sheet still carries significant costs and risks. They include, for starters, extremely low returns in vehicles like money markets; less use of financial leverage, which can improve gains to shareholders; and an open invitation to leveraged-buyout practitioners.

Also, a cash-laden company runs the risk of having its investors undervaluing it. "Investors may be scared of what management is going to do with that money," says Gregory Milano, chief executive of Fortuna Advisors. "If the company has a track record of poor returns in its main business or bad and overpriced acquisitions, the market may value the cash at just 60 to 70 cents on the dollar."

A cash-heavy balance sheet also increases conflict between shareholders and management. Idle cash is an escalating issue for boards of directors, says James Ellis, managing director in the finance operations consulting group at Accenture. "There are a growing number of board-level discussions where the C-suite is being pushed," he says. Before, board members simply wanted to know whether a company had a plan for its cash; now, they want to see the actual plan, says Ellis.

But deploying cash goes beyond making a single action or deal. "CFOs have to figure out what sustainable [financial policies] work in this climate," says Eric Olsen, global leader of the shareholder-value practice at The Boston Consulting Group. "That comes back to dividends, share repurchases, mergers and acquisitions, and investing in longer-term growth."

Flexibility Versus Return
That last option, investing in growth, may be at the top of the referred list in theory, but overall capital expenditures will grow modestly this year and next, according to a May report from Fitch Ratings. Studying a universe of 308 U.S. companies, Fitch found that capital expenditure fell 16.6% in 2009. The companies plan growth of 3.1% this year, and only 1.4% in 2011. R&D projections in many industries are also paltry.

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