U.S. CFOs Continue to Build Cash Reserves in Response to Better Operating Cash Flows

Higher operating cash flows are prompting corporate treasurers and chief financial officers in the U.S. to continue building their organizations’ cash reserves, according to data released by the Association for Financial Professionals (AFP).

The 2014 AFP Liquidity Survey indicates that 36 percent of companies reported rising cash reserves in the last year and among those that increased cash holdings, a full 73 percent indicated that bigger reserves were the result of better operating cash flows.

Fewer than a quarter reduced reserves over the period.

The main reason for any cash shrinkage was an increase in capital expenditure, which was reported by 43 percent of those that reduced cash, up from 32 percent in last year’s survey and 30 percent the prior year.

Other reasons for trimming cash were to retire debt (28 percent), fund acquisitions or launch new businesses (20 percent), and/or repurchase stock or pay out dividends (20 percent).

“There are definitely signs, such as higher operating cash flow, that could be indicating change and rising optimism in the marketplace,” says Matt Richardson, Senior Vice President and Head of Product Solutions at RBS Citizens and Citizens Bank. 

“The pace of economic recovery will determine cash decisions,” says Jim Kaitz, AFP’s president and CEO.

Kaitz notes that many companies will continue to pile up cash until they see business prospects significantly improve.

"But even today, we are seeing many forward looking companies using their cash to invest for the future," adds Kaitz.

Leaving non-U.S. reserves overseas

Meanwhile, just under half of organizations with operations outside of the U.S. expanded their non-U.S. reserves.

Most companies opted to leave their non-U.S. balances overseas either for reasons of unfavorable tax treatment at home, operational necessity or business opportunities in a particular region.

Companies are sticking to ultra-conservative investment strategies with their short-term holdings, with 75 percent of all short-term investments maintained within three vehicles: bank deposits, money market funds, or U.S. Treasury securities.

Safety is the prime objective for corporate cash, with more than two thirds of companies saying they seek safety first, compared to 28 percent that seek liquidity.

A full 52 percent of corporate cash holdings are maintained in bank deposits, the largest percentage reported since AFP began its Liquidity Survey series in 2006.

Bank deposits are attractive because companies are uncertain about future changes in money market fund regulation, many banks allow corporate customers to defray service fees through Earnings Credits on cash holdings, and the Earnings Credit Rates (ECR’s) on those holdings are slightly higher than prevailing interest rates on similar short term investments.

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