cfo.com

Print this article | Return to Article | Return to CFO.com

Company Cash Hoards Swell by 11%

The 1,000 biggest U.S. corporations also borrowed 7% more in the second quarter of this year than they did in the second quarter of 2010, a study shows.
David M. Katz, CFO News
December 13, 2011

The biggest U.S. publicly traded corporations have been stuffing their already bulging balance sheets with increasing amounts of cash, new research suggests. By the end of the second quarter of 2011, in fact, 1,000 such companies were holding $850 billion in cash, or 11% more than they had on hand at the end of the second quarter of 2010.

All that cash isn't being hoarded, however. The companies are holding a tad less of their revenues on their balance sheets, indicating that they're doing such things as investing in capital expenditures and retiring higher-cost debt, according to the study by REL Consulting, a division of The Hackett Group that focuses on working capital. Indeed, the ratio of capex to cash on hand increased about 14% year-over-year, according to the findings, which are based on corporate filings through June 2011.

Buttressed by currently low borrowing costs, the companies took on 7% more in total debt in Q2 2011 compared with the same quarter of 2010, the firm found. (CFO is developing a working capital benchmarking product in partnership with REL.)

Revenue for the companies grew to $2.6 billion in the second quarter in comparison with $2.2 billion in the year-ago quarter. As a result of the uptick in revenue, however, company managements "are now taking their eyes off the ball when it comes to efficiently running their businesses. Accounts receivable are bloated, and companies are holding more inventory for various reasons, only some of which are strategic," says Dan Ginsberg, an associate general principal with REL.

Indeed, the percentage of net working capital to cash on hand increased by 7% between the two quarters, with days working capital rising to 36.0 from 34.9. (An increase in DWC represents a dip in working capital performance.) Slightly more cash was tied up in inventory (31.0 in days inventory outstanding compared with 30.2 the year before) and accounts receivable (35.8 in days sales outstanding compared with 35.1).

While there may be good strategic reasons for a company to increase its working capital, that's not the case in terms of burgeoning accounts receivable, according to Ginsberg. To be sure, a company might be merely inefficient in managing its inventory. But another company might want to fund its working capital to prepare itself for international growth. In that case, "it's OK if your ratio of revenue to working lags a little bit," he says. "That could be a wise strategic decision."

On the other hand, "there's no reason that accounts receivable should be [high] except for customer-service issues. I don't think there's a strategic need to increase your accounts receivable," the consultant adds.

The results of an online survey released today by Capgemini, a consulting firm, appear to corroborate the trend to late payments. Forty-five percent of 304 executives from Fortune 1000 companies reported they have seen an increase in late payments from their clients, with 15% noting a major increase (a rise of 25% or more) in late payments within the past year.

Nearly 25% of those affected by payment delays said this trend has had a significant impact on their business. The top three areas affected by delayed cash flow were growth (29%), hiring (27%), and revenue (20%), according to the study, which was conducted in September by the Harris Organization. (Capgemini, through its business process outsourcing unit, advises clients on ways to improve their accounts-receivable performance.)




CFO Publishing Corporation 2009. All rights reserved.