Corporate Cash Positions Keep Swelling

The average size of cash balances held by giant U.S. companies in this year’s second quarter rose 11% over last year Q2 – creating a hoard totaling $850 billion among the 1,000 largest public companies – new research from REL Consulting says.

REL, a division of The Hackett Group, based its tally on filings of those top firms during the first half. Overall, the numbers show that as revenue increased, so too did cash on hand kept by companies. The total was $767 billion for the top-thousand companies in the 2010 Q2. However, debt also rose by 7% quarter-to-quarter, which the authors see as an indication that low-cost borrowing is being employed to boost the amount of cash retained by companies.

Companies are starting to increase the cash, as well, that they put to use for such purposes as dividends, capital expenditures and buybacks, the research showed.

Longer Collection Times, Swollen Inventory

But REL, which released a spreadsheet capturing the data [see link at end of story], said that the working capital performance for those companies was slightly poorer. The numbers show that they take 3% longer to collect from customers, for example, and they hold more than 3% additional inventory. In terms of payables, companies are doing a little better, however, helping offset losses in other areas, REL’s numbers showed, but the companies now have nearly $800 billion unnecessarily tied up in receivables, payables, and inventory.

"Cash hoarding continues to be the trend. But high cash balances don't necessarily indicate strong performance," Dan Ginsberg, REL associate principal, said in a narrative accompanying the spreadsheet. "The working capital numbers clearly show that while companies managed to right-size their working capital in late 2009, in response to economic challenges, they quickly lost focus once revenue growth returned, and the improvements they made were not sustainable. Companies are now taking their eyes off the ball when it comes to efficiently running their business. Accounts receivables are bloated, and companies are holding more inventory for various reasons, only some of which are strategic."

REL described some companies as struggling with access to the hundreds of billions in excess-working-capital cash they have tied up in their operations. It detected that mid-cap companies were doing the worst job with working capital, because there is less access to low-interest debt, and debt ratings are poorer. While common of such capital now include retiring higher cost debt, increasing cap-ex, and boosting buybacks and shareholder dividend payments, it said, the combination of elevated amounts of accounts receivables and the deteriorating inventory management “are bloating their balance sheets.”

The Uses of Cash

Of the cash being put to use, the REL research showed that for every $1 of revenue, companies now keep 33 cents on their balance sheets, down from 34 cents last year.

The Q2 ratio of cap-ex to cash on hand increased 15% from last year, indicating that some of the cash has gone into system upgrades, fixed-asset purchases and other expenses.

The rise in short-term debt shows that some companies are financing day-to-day business with borrowings, “rather than focusing on the efficiency and effectiveness of their own operations. In some cases, companies have no choice but to scramble for short term financing,” the analysis said. “In other cases, companies are not harvesting the cash latent in receivables and inventory.