Credit & Capital

Uncertainty Leads to Higher Corporate Cash Balances

More companies built up rather than subtracted from their cash holdings last quarter, but some plan to reverse course the last three months of 2013.
Vincent RyanOctober 31, 2013

While many institutional investors risk their cash buying increasingly expensive shares in corporations, the issuers are staying much more conservative. Once again, in the third quarter, more companies accumulated cash rather than investing or spending it, according to the Association for Financial Professionals’ quarterly measure of corporate cash holdings. The AFP survey said this trend in this quarter was  partly in response to the federal government’s budget battles in Washington. Although many businesses plan to reduce their cash balances in the fourth quarter, the plurality still plan to accrue cash.

Forty percent of the member organizations the AFP surveyed in early October said they held larger cash and short-term investment balances at the end of the third quarter compared with the second quarter, while 21 percent said they had smaller balances. That difference of 19 points — the cash increase percentage minus the decrease percentage — was 7 points higher than in the second quarter and 5 points higher than the reading a year ago.

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There was also a larger difference — 21 points — between the corporations that had larger cash holdings in the third quarter compared with a year ago, and those whose cash holdings fell year over year.

AFP’s president and CEO Jim Kaitz said in a statement, “This is a case of lost opportunity. While many companies expect to slow their pace of cash accumulation in the fourth quarter, they would have been putting that cash to work much earlier if not for the continued uncertain environment.”

Indeed, in the sample of AFP members, 26 percent plan to reduce their cash and investment balances in the fourth quarter. While 33 percent still plan to accumulate and hold more cash, the difference (7 points) is 8 points lower that the previous quarterly reading.

In its report, AFP said finance executives may be sensing the economic lull caused in part by political uncertainty in Washington will be short-lived, and because of that they may change their risk-averse approach.

But what CFOs, treasurers and other cash managers tell AFP at the beginning of a quarter is one thing, what they ultimately do is another. Last April, more organizations (a 5-point difference) said they planned to reduce their cash balances in the second quarter than add to them. However, when the AFP took July’s reading, it found the opposite happened — 38 percent of companies had increased their cash hoard compared with 28 percent that had cut it (a 10-point difference).

Judging by the process-improvement focus of finance departments, found in a  different survey, cash is still king. According to Protiviti’s 2014 Finance Priorities Survey, released Monday, cash forecasting is the highest priority for finance executives; working capital management is the fourth highest.

Finance’s focus on these two areas is a response to the “growing need for organizations to respond to economic volatility with greater precision, speed and flexibility,” the Protiviti’s report said.

The Protiviti survey had 220 respondents globally, including CFOs, vice presidents and directors of finance, and controllers. The survey was conducted in the second and third quarters of 2013.


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