No one seems to doubt the idea that companies' cash balances are continuing to climb. The latest numbers from the Federal Reserve show that corporate cash balances had hit $1.736 trillion at the end of the fourth quarter of 2011, an all-time high.
Anecdotal evidence also supports the idea that corporate cash levels are rising. For starters, many companies have issued intermediate and long-term debt recently, taking advantage of the low interest rates, says Tony Carfang, partner with Treasury Strategies. According to statistics from the Securities Industry and Financial Markets Association (SIFMA), corporate debt outstanding at the end of the first quarter of 2012 topped $8 trillion, a record. Companies' debt issuances mean more cash on their balances sheets. "In our experience, companies are holding onto cash," Carfang says.
In addition, a number of corporate treasurers and CFOs have talked, either publicly or among themselves, about their companies' intentions to hang onto cash as a buffer against a feeble economy and increasing regulations, as well as uncertainty about the financial status of Europe, Carfang adds.
So, it is pretty clear that cash balances are on the rise. What's less clear is by how much. The Fed's most recent numbers had been revised -- significantly. Corporate cash earlier had been calculated at $2.233 trillion, a level nearly $500 billion higher than the revised number, as this release from Treasury Strategies details. The previous total put corporate cash at about 14 percent of the U.S. GDP. With the new number, it's at about 11 percent, or about where it's been since 2004, the release states.
So far, the Fed has not responded to requests for an explanation of the change, Carfang says. All that's clear is that the number for corporate checking deposits was slashed from $672 to $379 billion -- a drop of more than 40 percent.
The numbers matter to more than just academics and corporate treasurers. Carfang notes that the idea that companies are hoarding cash -- rather than investing in their operations and adding jobs -- is prompting some in Congress to call for a remedy, such as a tax on cash held abroad. "There's been no specific legislation passed, but the narrative is out there," Carfang says.
In addition, some execs have wondered if spending more of their companies' cash, particularly on new hires or capital investments, might position their firms as better corporate citizens, Carfang adds.
While the appropriate strategy for managing all that cash will vary from one company to the next, Carfang offers several principles that apply fairly broadly. For starters, companies need to have in place the systems that will allow them to keep tabs on their cash balances, as well as the financial institutions in which the cash is placed. The goal? No surprises, Carfang says.
Similarly, it doesn't hurt to double-down on cash forecasting efforts. That way, companies can be better positioned to take advantage of investment opportunities that might appear, or to ride out any rough patches.
Finally, Carfang advises corporate finance folks to review their companies' investment policies. With interest rates so low, the temptation to load up on risk in order to boost returns becomes greater. A reminder of the rules may help quash any thoughts of moving to riskier securities.
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