How much cash is "too much"?

Many of the most credit worthy companies have more cash on hand today than they have had in the last 10 years (i.e. pre trhe "great recession"). According to several news sources cash as a percentage of assets is at an all time high.

Do companies have too much cash and how would they know ?

The answer depends on a forecast of future uses, both tactical (short term) and strategic

- Debt levels - despite the rise in the cash / asset ratio the cash / debt ratio has remained constant (not good) despite the so called de-leveraging of corporate balance sheets. With volatile operating cash flows companies are afraid to spend cash because they may not have "enough" to pay off their debts when they come due. While kicking the can down the road helps the amount of debt remaining is inhibiting the use of cash for more productive purposes in the future

- Liquidity metrics - few companies actually have metrics associated with liquidity. (i.e. excess compared to what? the past or the future?). Further even fewer companies plan their balance sheets (i.e. cash levels). Therefore, many companies are probably as surprised as others about the large amount of cash on their balance sheet.

Finally, no good deed goes unpunished. The large amount of cash on hand could be used to acquire "assets" generally seen as reasonably priced (i.e. hire smart people, of which their are many, who are underemployed. Buy competitors who have customers and products needed for the 22nd century?).Which use is the best use?

Companies that fail to take advantage of today's bargins may find themselves in a bidding war for these assets in the future in order to show growth. At the same time they will be squeezed by investors who now want this “excess” cash for their own purposes (i.e. demands for dividend increases will rise)

Companies that fail to exploit the best use of this "excess" cash will find themselves less competitive in the future becasue they either do not have enough or had used that cash unwisely. Any decision about use of totday's clearly underutilized asset (i.e. low returns from investemening) carries with it a risk, but then management is not being paid big bucks to do nothing.

Perhaps the issue is not too much cash but too little risk taking?

Great minds can differ of course.

Answers

Linda Wright Consultant • July 3, 2013

As you know, this is a complex issue. However, if acquisitions, expansion, debt or equity buy backs have been explored and do not offer sufficient returns, then return to principals or shareholders may make sense. Those constituencies should and probably are asking about the cash.

Bruce Lynn Managing Partner • July 3, 2013

Linda

Agreed although I believe the investors are last in line when it comes to use of cash for several reasons, good and bad:

Good - management believes that "their" use of cash is better than what the investors can do with it (e.g. new plant, acquisitions will generate more return). Capital asset pricing model says this is not true, but it is a theory and the real world is messy

Bad - do not have the metrics to know how much is excess cash. Apple had to be sued before they would pay dividends. I guess 135 Billion was not enough cash to execute their plans?? (what are their plans? Apple traditionally does not tell anyone)

Regis Quirin Director of Finance • July 3, 2013

Cash is lazy. If it is not working, it has an opportunity cost. But calculating that opportunity cost is difficult, if not impossible. If the market stays stagnant the risk of using that cash in an activity with little or no ROI is high. This trend will continue until shareholders become more vocal. But shareholders will not demand Investment, which is better for the company. They will demand a Dividend. Apple dodged that bullet by issuing debt.

The only good reason for the huge cash stores is regulation. The capital requirements have increased greatly for banks. Is the opening statement above with or without financial institutions?

Wayne Spivak President & CFO • July 3, 2013

CFO.com just had an artilce about "too much cash"

http://www3.cfo.com/article/2013/6/cash-management_companies-hold-too-much-cash-debate

Bruce Lynn Managing Partner • July 4, 2013

Regis

Cash is certainly busy being lazy. (i.e. earning almost no return from being invested in financial alternatives; not being used to build future business).

Arguably, the value of cash rich companies is depressed because, in the eyes of investors, there is uncertainty about how best to deploy this cash plus lack of immediate payback (i.e. dividends in one form or another). The second condition can be fixed and would make cash less lazy.

I believe management has let cash become lazy not only because they lack liquidity metrics but also because there is no incentive to generate more cash or even use the cash that they have. (i.e. can't pay dividends because maybe we will need this cash for something else we don't know about). Risk adverse is fine up to a point. See Apple and its use of cash which required a lawsuit to help management decide.

Who get's a bonus for generating cash or even for assuring that the CAPEX proposed has hit its target. Bonuses are for P&L performance, not for optimizing liquidity.

As Peter Drucker used to say - what gets measured gets managed

Konrad Sosnow Revenue Recognition Guru • July 5, 2013

Cash is a unique asset due to its liquidity. Having enough cash on hand is important when unexpected bad things occur, as they surely will. In other word, it acts like an insurance policy. But like insurance it is not free - opportunity cost. I was taught that cash is king and that managing cash is one of the three most important things that a CFO can do, the other two being drive revenues and control costs.

Barrett Peterson Senior Manager, Actg Stnds & Analysis • October 6, 2013

The "right" amount is a complex issue with no "right" answer and requires consideration of company plans, cyclical cash payment requirements for leases or debt/dividends, taxes, and capital outlays. Large cash balances for multinational companies are typically non-US balances which are subject to sizeable US taxes if repatriated...so they aren't. In select cases, complex inter-company transactions can "access" a portion of that cash.

Donald McRae Director Accounting Operations • October 7, 2013

I presume that one factor influencing the record levels of cash is the large amount of off shore cash companies are holding. Organizations appear hesitant about bringing cash back from their off shore operations to the U.S. due to the tax implications. For many companies, the opportunities for using cash overseas are more limited. If companies had a pressing need for cash, the cash would flow back to the U.S. Similarly if the tax laws were to change, cash would flow back and the cash would more likely be used for dividends, acquisitions etcetera.

Jack Judd Retired • October 8, 2013

Cash balances are currently high on US companies as the markets are generally not punishing for low asset returns. Sooner or later investors will insist on dividends or growth initiatives that will take cash.

Ken Stumder Finance Director / Controller • October 8, 2013

Just read the article Wayne references from CFO.com and this excerpt was telling:

**Like Silverblatt, Graham doesn’t see companies drawing down their cash stockpiles until consumer demand returns. “Politicians say companies need to spend their cash and boost the economy. But that’s not the way businesses think,” he says. “If the underlying demand is not there, it doesn’t make any sense for them to start spending cash — to hire more people, build a plant, make an acquisition. A company’s purpose is not to increase job growth, it’s to be profitable.”

That said, Graham is no fan of fortress balance sheets, either. “GM was making cars that people didn’t want. What did it take for them to finally produce the cars they needed to? Bankruptcy.” Had GM had plenty of cash on hand, “they might not have woken up to the fact that they needed to change their cars,” says Graham.

Similarly, had J.C. Penney and Sears changed their business models 10 years ago, they might be doing better today, says Graham. “Companies have a tendency to wait. Cash reinforces this. In a sense, the pressure to produce now is not a bad thing.”**

I found the suggestion that cash can provide companies with a false sense of security which stalls innovation interesting.

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