CASH IS A JEDI KNIGHT
In Part One, we talked about the conventional wisdom that companies have been hoarding their cash as a way of mitigating against the uncertainty of demand, and in continuing skepticism about the strength of the global financial system. Is there another method to the madness?
Gillian Tett, highlighting a research piece from Canada’s CD Howe institute, writes in the Financial Times that the cash stockpile may have everything to do with the fact that better technology, logistics and supply chain solutions permit companies to dramatically reduce inventory levels – which can be augmented at a moment’s notice to meet changes in market demand with a strong cash hoard.
The CD Howe Institute’s research bears this out – at least for Canadian companies. In the last 25 years inventory has fallen from 15% of corporate assets to 8% – while on the same ratio cash doubled from 4% to 8%.
According to the report, “The profound drop in inventories is consistent with the notion that businesses are motivated, and enabled by improved logistics and management information systems, to ensure that the right products are present at the right place and time”.
So if this theory is true, it may tell a different story about cash on corporate balance sheets. Cash isn’t really a mere king anymore, it’s more like a Jedi Knight – used to react swiftly and decisively to changing market conditions and increase inventory levels at a moment’s notice.
And as importantly, cash can’t possibly be put to this use unless solutions and technologies are up to speed to permit instantaneous collaboration between companies, their supply chains and the changing markets they jointly serve.