Stuck on Yellow: The 2005 Cash Management Scorecard

Companies continue to be cautious with their cash.

If the trends of the past two years continue, corporate cash-to-sales ratios will continue to grow in 2005, though at a slower pace. That would make perfect sense to all those finance executives who agree that absent extenuating circumstances such as the need to fund an acquisition or carry the company through a business downturn, holding excess cash is a drag on performance. Too bad those circumstances are so hard to predict.

Randy Myers is a contributing editor of CFO.

Calculating Excess Cash

The Cash Management Scorecard prepared for CFO magazine by REL Consultancy Group uses public information reported by 1,000 U.S. companies to calculate the returns that companies would generate by paying down capital employed with the excess amount of cash on their balance sheets. For this purpose, cash is defined as cash + cash equivalents + marketable securities, and capital employed as short-term debt including notes payable + long-term debt + equity.

To calculate the opportunity cost of excess cash, REL first figures out how much of a company’s cash exceeds its industry benchmark, which REL determines to be the lowest quartile in a given industry as a percentage of sales. Then it subtracts that excess from the amount of capital a company employs. The company’s return on capital employed (ROCE), based on 2004 pretax operating profits, is then compared with what the return would be after excess cash is used to reduce the amount of capital employed. The comparison is not made for companies with excess cash that have negative ROCE.

Cash Is Still King

Companies continue to let cash grow, albeit more slowly.

While cash on corporate balance sheets continued to grow last year, it did so at a slower pace than during 2003, according to CFO‘s second annual Cash Management Scorecard. And the breadth of the increase narrowed, as the number of industry sectors experiencing gains fell to 47 out of 78 in 2004, down from 58 in 2003. Leverage levels also have been trending lower over the past two years. The debt-to-total-capital ratio for the universe of companies fell to 43 percent in 2004, down from 46 percent in 2003 and 49 percent in 2002. Still, as the main story notes, finance executives show no sign of abandoning their caution when it comes to cash.


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