Solid Data on Corporate Liquidity

Companies are building cash reserves by increasing operating cash flow, and they're storing cash in extremely short-term instruments.

The AFP’s annual liquidity survey supports the widely held belief that companies are stockpiling their cash.

Almost twice as many survey respondents reported that their organization increased its cash balance over the past year (40 percent) than reduced its cash balance (22 percent). And the trend persisted when respondents were asked what they expect their companies to do in the year ahead: 31 percent said they expect an increase, 19 percent expect a decrease, and 50 percent expect no change in their cash balances over the next year.

In today's economy, what are the key drivers of the cash buildup? Among companies that increased their cash holdings, the majority were able to do so by increasing their operating cash flow, according to participants. Much smaller proportions of companies increased cash holdings by increasing their debt load, acquiring another business or launching new operations, and decreasing capital expenditures. (See Figure 1, below.) Among companies that are holding less cash today than a year ago, acquisition or organic growth was the number-one reason, followed by increased capital expenditures and decreased operating cash flow. (See Figure 2, below.)

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062413-AFP-Figure 2

About three-quarters of all companies represented in the AFP survey have written policies for cash investment, guiding decisions like which investment vehicles a treasury team can use for short-term investments and what proportion of the company’s cash balance can reside in each vehicle. Fifty-nine percent of companies with annual revenues under $1 billion have such a policy, as do 89 percent of those with revenues over $1 billion. Among companies that have a written policy, 49 percent review and update the policy once a year. Nineteen percent review and update it more frequently, while 16 percent do so every two to four years. The remaining 16 percent do not review their cash investment policy on a regular basis.

Compared with the AFP’s 2012 liquidity survey, this year’s respondents report that their companies are more stringently limiting investments in certain asset classes. For example, 60 percent said their company limits municipal securities to a quarter of its portfolio assets, compared with 46 percent last year, and 48 percent restrict Eurodollar deposits to a quarter of the portfolio, vs. 26 percent last year.

The average company represented in the survey holds 50 percent of its short-term investment portfolio in bank deposits—which is only 1 percentage point below the highest level of bank deposits reported in the survey’s eight-year history. Few companies responded in a dramatic way to the expiration of unlimited FDIC insurance at the end of 2012, under the Transaction Account Guarantee (TAG) program. Fifty-seven percent of respondents said this change had no impact at all on their cash and short-term investment allocations.

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Beyond bank deposits, the most popular vehicles for short-term investments are diversified money market funds (10 percent of short-term investment portfolio, on average), Treasury bills (8 percent), “pure” Treasury money market funds (6 percent), and Eurodollar deposits and commercial paper (4 percent each). The average portfolio includes 2.7 investment vehicles, and these vehicles have very short maturities. Only one in five instruments in treasurers’ short-term investment portfolios has a maturity longer than 90 days. (See Figure 4, below.)

In addition, most cash is held within the United States. Nearly two-thirds of respondents said that less than 10 percent of their company's cash is outside the U.S., whereas one in five respondents said at least 50 percent of their company's cash is held abroad. Half of all privately held companies—and 51 percent of companies with revenues under $1 billion—keep no cash outside of U.S. borders.

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