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Sitting Comfortably on a Cash Cushion

Finance executives are holding on to their cash, and for good reason.
Kate O'Sullivan, CFO Magazine
November 1, 2011

Despite the fact that the economy climbed out of the depths of the recession more than two years ago, CFOs continue to protect their companies' liquidity and cash positions. Plagued by uncertain demand and volatile world markets, finance chiefs have increased their cash holdings by 3% on average over the past year, according to the latest CFO Deep Dive Survey, which polled U.S. finance executives last month. U.S. nonfinancial companies held more than $2 trillion in cash and other liquid assets at the end of June, up nearly $90 billion from the previous quarter, according to the Federal Reserve.

For some finance chiefs, that still doesn't feel like enough. More than 40% of CFOs say they wish their companies had more cash, even though 39% say they hold "somewhat" or "substantially" more than they would hold under normal market conditions. A third of finance chiefs say they have just the right amount of cash, while more than a quarter say they have too much cash and need to put some to work.

Asked what would prompt their companies to part with some of their liquid assets, 40% of CFOs say a compelling acquisition opportunity could spur them to spend. Another 30% say an increase in demand for the company's products or services would be the most important factor driving a spending decision.

Jack Early, controller at SentryNet, a security company based in Florida, says he thinks his company is holding too much cash, but that right now there aren't any real incentives to move it into other investment vehicles. Meanwhile, the company is "staying on top of receivables" and collecting promptly, and its cash stores continue to grow. SentryNet made some capital expenditures last year and doesn't have any major purchases in the works, but the company is hiring "short-term and long-term," according to Early, and he says they may make investments in some PCs and servers in the coming year.

Image links to Deep Dive Survey charts, Q4 2011

A Vicious Cycle
"We'll spend money when the economy improves, but if we spend money, the economy will improve," says Early. "That goes from hiring to capital spending to compensation. It just goes around and around."

CFOs acknowledge that large corporate cash balances are a factor in the economy's sluggish, uneven recovery. Forty-three percent say they are a major factor in the country's slow growth, while another 46% say they are a minor factor. Only 11% say they are not a factor. But a large majority — 71% — say companies have no obligation to put their cash to work, contrary to what some business pundits have urged. CFOs argue that hiring or spending for the sake of pumping cash into the economy would end up costing jobs in the long run, as overexpansion without demand could ultimately lead to layoffs or business failures.

"People are going to put money to work to buy equipment or inventory or to hire people when they think they are going to get a good return on that. It's their obligation, their fiduciary duty, to make sure that capital is being deployed efficiently," says Bill Carroll, CFO at HoMedics, a maker of home beauty and spa devices. The cash will be spent eventually, he says, just not right now. Indeed, a quarter of finance chiefs responding to the most recent Duke University/CFO Magazine Global Business Outlook Survey, which polled CFOs in late August and early September, say they aren't planning to deploy cash in the next 12 months, because they lack attractive investment opportunities.

The painful memory of layoffs could also be a factor in finance executives' current cautious stance, says Carroll. "We've just gone through a very rough time. Things were pretty dark in 2008 and 2009, and that's very recent history," he says. "Holding cash balances is a comfort, a cushion against the economy continuing to be slow or possibly retreating. If companies didn't have that cushion, they might be required to take more-dramatic action to reduce costs if the economy does slow."

Cash and short-term investments at S&P 500 companies (excluding financial companies)

CFOs appear to be seeking the comfort of cash even more now than they were a year ago. Fifty-five percent of finance executives say it is not likely that their companies will begin to deploy their cash reserves during the next 12 months, according to the third-quarter Global Business Outlook Survey. That number is up 5% from the third quarter of last year. Echoing Carroll's point, a third of those who don't plan to spend say they need cash as a liquidity buffer, and nearly as many say they are holding cash until economic uncertainty declines.

Of the 45% who say they will be deploying cash in the coming year, 57% plan to make capital expenditures. Twenty-seven percent say they will pay down debt, and 21% will spend cash on dividends or share repurchases. Another 20% plan to use cash to add staff.


Kate O'Sullivan is a deputy editor at CFO.




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