Easing Up on Cash Hoarding

A trickle of companies report they are making capital expenditures.

A few companies stopped adding to their cash cushions last year, suggesting that businesses are becoming a little more confident in the U.S. economy, according to the Association for Financial Professionals’ 2011 Liquidity Survey. 

In the poll of 364 companies conducted over the last 12 months ending in May, 39% said they had more cash and short-term investments in the first quarter of 2011 than they did a year earlier, vs. the 43% that reported having more cash in the 2010 survey. Thirty percent of the companies had less cash in the first quarter than a year earlier, vs. 24% in last year’s survey.  

Thomas Hunt, director of treasury services at AFP, says the increase in the portion of companies that have less cash than a year earlier also points to increased optimism.  

“There’s a small sliver whose balances are lower because they’re spending and investing back in the business,” Hunt says, noting that 28% of the companies with lower cash holdings said they had retired debt, another 28% said they had increased capital expenditures, and 15% said they had made an acquisition or started new operations.  

When it comes to investing their cash, companies remain “extremely risk averse,” Hunt says, citing survey data showing that 77% of companies name safety as their primary consideration in selecting short-term investments, up from 76% in 2010. On the other hand, only 18% cited liquidity, down from 22% last year, and 5% say they’re focusing on yield, which is up from 2% last year. 

The survey, which was sponsored by Citi, also shows more companies are parking money in the bank, with 42.4% holding bank deposits, which could be time deposits, CDs or demand deposit accounts, up from 41.5% in 2010. The earnings credits that companies get on checking accounts are currently higher than yields on money funds, Hunt says, and in combination with the unlimited FDIC insurance currently available on business accounts, have encouraged treasurers to hold more in their bank accounts.



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