Cash Management

Is Cash Peaking?

More CFOs plan to deploy cash reserves in the next 12 months, but those plans hinge on overall economic improvement.
Vincent RyanSeptember 30, 2010

Despite the rampant pessimism about the U.S. economy among finance executives and their bosses, there are hints they may be loosening their grip on corporate cash balances — or at least putting a ceiling on the most liquid portion of their balance sheets. In other words, the near-$2 trillion stash of corporate cash in the United States may finally be shrinking.

In a survey of 300 corporate clients by consultancy Treasury Strategies during the last week of August and early September, the percentage of respondents who said their cash levels will increase in the next six months was 30%, down from the 39% who increased their cash during the past six months. Another 23% plan to reduce holdings of cash, while 47% will keep cash holdings level.

While the falloff in companies expecting to increase cash levels wasn’t huge, it could represent the beginning of a trend. Those expecting cash levels to decline said acquisitions and capital expenditures were leading factors.

“Because companies adjusted their balance sheets and expenses during the recession, when things started to pick up, their operations threw off a lot of cash,” says Anthony Carfang, a partner at Treasury Strategies. “Now as companies see light at the end of the tunnel, they are less concerned about prepaying some of their long-term debt. They’re less fearful about access to capital markets.”

The Treasury Strategies results were echoed by recent numbers from the third-quarter Duke/CFO Business Outlook Survey. Fifty percent of the 937 CFOs polled said they will deploy their cash reserves over the next 12 months, and 56% of those will allocate some of that money to capital spending and investment.

On average, U.S. finance executives in the Duke/CFO survey plan to increase capital spending by 6.6%, dividends by 4.7%, and technology outlays by 4.1% compared with the previous 12 months, although there were wide firm-specific variations in the numbers.

What can’t be ignored, however, is that in that last half year, 54% of companies whose cash levels fell cited negative cash flow from operations as the leading reason, not investment, says Treasury Strategies. Going forward six months, only 30% of executives expect that to be the case.

Many companies, then, are still carefully managing liquidity. While positive cash flow from operations was cited by 88% of companies as the most powerful driver of rising cash levels during the past six months, the second-most-cited reason — by 32% of respondents — was “reduction of inventories.” Slightly more executives plan to generate cash by slashing inventory in the next six months.

“Inventory is more controllable than many other operating costs,” comments Carfang. “You can decide whether to restock an item, but you can’t decide that a customer will pay you five days earlier and be assured it will happen.”

While there’s evidence that companies are replenishing inventory, “the recovery has been spotty — some companies are increasing [inventory] and others are decreasing it,” says Carfang.

There’s no evidence in either survey that positive cash flows and cash deployments will continue to rise, or even be sustained. Half of the executives in the Duke/CFO survey said there is only a six-month window in which they can maintain current levels of business activity without improvement in the overall economy. Another quarter set the deadline at 12 months.

“The companies throwing off a lot of cash have staying power and may see an opportunity to grow market share, but others are still retrenching,” says Carfang. “It’s the ‘haves’ versus the ‘have-nots.’”