Companies have started to put their hoards of cash to work, signaling a cautious optimism about an economic recovery, according to an annual liquidity survey published by the Association for Financial Professionals. This year’s findings also signal a renewed confidence in the banking industry, at the same time that corporate treasurers are taking a more significant role in company operations.
The 2013 AFP Liquidity Survey revealed that while two-thirds of a record 885 respondents are still putting safety first, they’re also planning for growth. Last year, “safety first was the theme heard over and over again,” says James Gifas, head of treasury solutions for RBS Citizens, which has sponsored the report for the past two years. Sixty-eight percent of respondents cited safety first; 29 percent placed priority on liquidity, up significantly from 22 percent in 2012. Two percent cited yield.
Forty percent of companies increased their cash balances in the first quarter 2013 versus first quarter 2012.
But more revealing is the finding that companies with reduced cash balances had increased their capital expenditures, had acquired another company, or had launched a new product. Less than 25 percent of respondents indicated that their organizations had reduced cash and short-term investments in first quarter 2013; 39 percent noted no significant change.
The reasons behind both cash-building and cash-reduction seem equally optimistic, for the most part. Of companies citing higher cash balances, an encouraging 54 percent of respondents cited higher operating cash flow – not an unusual development coming out of a recession. Seventeen percent said they accessed debt markets; 16 percent acquired a company or launched a new operation. Those who reduced cash balances also cited acquisitions or new operation launches (36 percent), increased capital expenditures, or decreased operating cash flows (26 percent).
Another bright note: the findings signal a renewed confidence in the banking industry. The end of unlimited FDIC coverage of corporate deposits at yearend 2012 was expected to have a dampening effect on corporate cash deposits, but that did not occur; 50 percent of short-term investment balances were held in bank deposits, almost unchanged from the 51 percent in 2012. That’s up significantly from the 25 percent in 2008. Gifas notes that the rigorous risk management policies that banks are implementing may be decreasing the significance of FDIC coverage in the eyes of corporate customers. In addition, treasurers are placing more restrictions on their investment in municipal securities and Euro deposits, the latter particularly in light of last year’s Euro crisis.
Seventy four percent of all cash balances are held in banks, money market funds and Treasury securities.
On the uncertain side, anticipation of regulatory changes affecting money market funds is on the minds of treasurers; up to 65 percent of organizations would curtail their investments in money market funds currently in their portfolios if net asset values were required to float, and 56 percent said they’d be less willing to invest should fund companies limit redemptions or charge fees for full redemptions of money market holdings.
The AFP, which authors the Liquidity Report, cautions that corporate treasury departments still face challenges dealing with the global market as they deal with limited time and resources. Treasury departments are looking for cost-effective ways to automate traditional activities to free up staff to do more value-added activities, in order to deal with issues such as credit stability in developing nations and continuing regulatory reform in the U.S.
Email: coneill@thewarrengroup.com
