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Cliff Notes #3: Buried Treasure – Corporate Cash and Prepping for the Doomsday Fiscal Cliff!

Hiding Money in Mattress

My grandmother, like many of her generation, developed a bone deep desire to stockpile cash as best she could after the hard earned lessons of the early 20th century.  Given that she had seen her bank deposits disappear overnight in the financial cataclysm that was the Great Depression, she also had an abiding wariness of these institutions and chose instead to keep a good portion of her cash cushion not in a bank, but buried in a secure box in a secret place in her garden! (A place we never found, by the way, but that’s a bitter story for another day.)

I got to thinking about this recently when the US Federal Reserve released its quarterly data on corporate cash.  The numbers showed a continuing, if somewhat slowing trend, of growing corporate cash piles.  According to the WSJ article on this, US Non-financial firms grew cash balances by $44 Billion in the last quarter, raising total balance sheet cash to $1.74 Trillion which represents about 5.6% of their total assets.  Clearly, even while accelerating some dividends ahead of the Fiscal Cliff,  many companies are still maintaining “Fortress Balance Sheets”, pulling resources into the keep and barring the gates against the threat of marauding fiscal cliff or recessionary hordes.

Apparently, as the Association for Financial Professionals (AFP) pointed out in this year’s annual liquidity survey, “Events during the past four years that have had an impact on organizations’ cash positions are still fresh in the minds of many financial professionals and continue to influence how they manage their cash.”  In short, they continue to hoard it!

But it is not the fact of strategic cash piles, but rather what is being done with this cash that reminds me of my grandmother.  According to the AFP report from earlier this year (which presumably still holds true), 51% of short term cash is held in bank accounts – the highest share in the report’s history – and 59% said their plan for the coming year is to continue to do so!  This is no surprise with an overwhelming percentage of respondents saying safety of principle (77%) and Liquidity (21%) are their primary “investment” goals, compared to only 2% citing Yield as a goal.

This sounds an awful lot like what my grandmother did in burying her cash in the garden…safely socking away cash and maintaining its accessibility while earning absolutely nothing on it!

Yield may be the least of the Treasurer’s holy trinity of cash investing at the moment, and reasonably so. But what if some of that cash could be put to work in a short term investment that had absolutely no risk of principal loss and could actually earn double digit annual yields as well?  And what if such an investment reduced risk by injecting much needed liquidity into the company’s financial supply chain?

Such an investment does exist through Dynamic Discounting , where companies pay suppliers early (20-45 days on average) in exchange for a  discount (24% APR on average).  While this does not remove the need for holding cash as a hedge against uncertainty, many companies are nonetheless finding it a way to save millions and earn significant yield on otherwise idle cash, putting some of it to work for their shareholders to earn an excellent yield without putting it at risk.

It’s worth looking in to as an alternative to letting all of your cash gather dust in a bank vault earning next to nothing like a financial doomsday prepper (like this guy).  If my grandmother had a similar option for her cash, I am sure she wouldn’t have buried so much in her garden.

To learn more about the opportunity to earn risk free yield on cash through Dynamic Discounting, check out this Treasury and Risk webinar, or go here to read more about it.

About the author
Drew Hofler
Drew Hofler
Manage Cash Solution Marketing Director

Drew manages the product marketing of Ariba’s Working Capital Management and Payment suite of solutions, including Ariba Discount Pro, Ariba Third Party Financing, Ariba Receivables Financing, and Ariba Payment Pro. A more-than-20-year backgroun... Read More >>>

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