CFOs Remain Cautious With Corporate Cash

By Vincent Ryan

Credit may be bountiful and cheap, but finance chiefs refuse to play fast and loose with the cash on their balance sheets or spend big on capital investments that will deplete liquidity.

Restraint characterized the strategies for cash deployments and short-term investments for the bulk of 2018 and the beginning of 2019, according to the latest Association For Financial Professionals annual liquidity survey.

In the 12 months to March 2019, about half of the 496 finance and treasury professionals surveyed by the AFP said the size of their cash hoards had not changed much, either domestically or outside the United States. Of those whose overall cash balances had changed, 20% said their cash levels were smaller and 30% said they were larger.

Increased operating cash flows, higher debt levels, and a pullback in capital expenditures were most often cited as the reason for more cash on hand.

The survey results, released in late June, were somewhat surprising given 2017’s federal corporate tax cut designed to boost bottom lines and promote corporate investment.

“Advocates of the [Tax Cut and Jobs Act of 2017] hoped the law would motivate organizations to loosen their purse strings and invest in hiring, increase capital spending, and raise wages,” the AFP noted in its report accompanying the survey.

By March 2019, when the survey was conducted “business leaders had sufficient time to explore how their organizations could best benefit from the TCJA,” the AFP said. But a majority of them (57%)  made no changes in their spending or allocation patterns as a result.

Less than one-fifth (17%) of organizations had paid down debt or supported their share repurchase programs (14%) with the proceeds from the tax cut. Only 11% said they increased capital expenditures.

In the months ahead, 61% of treasury and finance professionals reported that their organizations will follow the same script — retain the size of their cash balances. About one in five respondents anticipated their company’s cash balance would rise (20%), but about the same number said their balance would fall (19%).

Of those that projected their cash holdings would grow, more than three-fourths (77%) cited increased operating cash flow as having a significant or some impact on that expected trend. Of those drawing down cash balances, most attributed it to larger capital spending or paying down debt.

(It’s worth noting that in AFP’s regular cash surveys finance professionals often signal an intention to deploy cash in the coming quarter, thus decreasing their cash balance. Afterward, they have often have done just the opposite — limited their cash spending and actually increased their cash balances.)

As to how finance organizations are investing all their excess cash, safety remained the most important short-term investment objective for treasurers, cited by 64% of respondents, with liquidity coming in second at 33%.

On average, 69% of all short-term investment holdings by respondents’ companies were in vehicles with maturities of 30 days or less. Another 12% of short-term investments were held in vehicles with maturities between 31 and 90 days. Only 11% of respondents expected to lengthen the average maturity of investments in the next 12 months.

Given the flattening and the inversion of some yield curves, “many investors will likely remain on the short end of the maturity curve, not only for safety purposes but also in terms of matching liquidity [to] working capital needs,” the AFP said.

The typical organization surveyed maintained 46% of its short-term investment portfolio in bank deposits and 22% in money market funds. The most commonly used bank products were structured bank deposits and time deposits.

When selecting a deposit bank, almost all the finance executives (93%) said the major determinant was their overall relationship with the bank. The credit quality of a bank was a deciding factor for 68% of finance professionals, while compelling rates on deposits were a factor for 51%.

As to the possibility of bringing home cash generated overseas to bulk up U.S. cash balances in the coming months, less than one-fifth of respondent companies (16%) repatriated funds, and half ot those moved less than 25% of their offshore earnings.

“Given that the provisions of the TCJA are permanent (absent future Congressional action), it is possible that companies may not have been so eager to take advantage of the repatriation of offshore funds,” said the AFP.

The largest group in the survey (34%) has revenue between $1 billion and $4.9 billion. Another 15% has revenue of under $1 billion. Publicly held companies accounted for 47% of the survey respondents.