Stockpiles of Cash in an Uncertain Market

The tightening credit market means it is time to hoard cash, say treasurers who also complain that regulatory snags hamper their investment strategy.

Companies are hoarding cash as they face the uncertainty of the tightening credit market, say a new survey that polled 449 corporate treasurers. And it looks like the trend will continue, says the Association of Financial Professionals, who conducted the survey. Indeed, 36 percent of the treasury executives said that they held a larger U.S. cash and short-term equivalent balance then six months earlier; while 27 percent said that they expect their companies to increase short-term balances over the next year.

The report, the “AFP 2007 Liquidity Survey,” gathered results over a six-month period between November 2006 and May 2007, with the intent of revealing how companies currently manage their short-term portfolios. “Companies hold and accumulate cash for a number of reasons, including a precautionary cushion against unexpected events, protection against a ‘credit crunch’, and the ability to fund strategic investment opportunities that may arise,” said Jeff Glenzer, executive director of the AFP’s Corporate Treasurer’s Council. However, he says the market appears to be the biggest culprit behind the cash buildup. “The current investment climate and economic conditions have not yet presented a compelling argument for companies to invest rather than preserve cash,” Glenzer said.

That means that until strategic investments are identified, companies are managing cash conservatively, says AFP. For instance, while corporate policies allow treasurers to dabble in several different types of short-term investments—beyond bank deposits and treasury bills—most stick to an average of 2.7 different options for their cash and cash equivalent investments. Mutual funds, commercial bonds, and repurchase agreements top the list, the survey found. Meanwhile, two-thirds of the treasurers noted that corporate policies permit them to invest at least half of their cash and short-term equivalents balances in bank deposits, money market mutual funds, agency securities, and treasury bills.

Other interesting findings include treasurers’ expectations about cash versus cash equivalents investments. The study found, for example, that treasurers reckon they will earn an additional 25 basis points by putting their money to work in cash equivalents investments, rather than straight cash investments. The study found that some short-term investment vehicles have been abandoned en masse. One-third of the companies that invested in either auction-rate securities or variable-rate demand notes reduced use of the vehicles after the major accounting firms ruled that such investments were not cash equivalents.

Another accounting pronouncement—the proposed Financial Accounting Standards Board rule to eliminate the cash equivalents heading from financial statements—also may be a future concern of treasurers. But right now respondents say it is too early to say whether balances will be affected by the proposed change.

To be sure, 37 percent of finance professionals surveyed mentioned that regulations, as well as tax and legal considerations, hamper their short-term investment strategies. Further complicating matters are rules and regulations—especially interpretations—that tend to be “dynamic” in nature, sometimes changing from one quarter to the next.

Treasurers identified four major in-house problems that their companies face in trying to “optimize investments,” including obtaining accurate cash forecasts (67 percent); getting real-time visibility over cash in bank accounts (42 percent); consolidating cash held in multiple entities (42 percent) and late-day transactions (39 percent).

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