AFP* Liquidity Survey
This survey sponsored by RBS Citizens received 740 responses from a diverse group of companies to gauge the latest ideas financial managers have and the challenges and opportunities they face in today’s marketplace.
What you should know about your business can be complex. Let's get rid of complex and make it accessible, quick, and painless. The PDF report is available on the AFP site and can be accessed online or downloaded. The following summarizes the survey and highlights what the business world is doing with their cash and explains why. There are many tables and charts in the report that do a great job of putting the data in perspective; get the download and check it out!. Notes: The Fed reduces QE gradually through 2014 followed by a rising federal funds target rate into 2015. Corporate cash accumulation growth has slowed, spending increases - growing confidence of US businesses in -capital investments, hiring workers, increases in acquisitions, dividend payouts, and repurchase of company stock.
Unchanged are large balances of bank deposits - cash rules in deals and mergers. Largest level of cash holdings to date - 52% of all cash holdings are in banks. In 2008 companies held only 25%. Why? – currently no other liquid options for cash. The benefit comes from banks Earned Credit Rates (ECR’s) where large cash reserves reduce a company's banking fees.
There are some changes on the horizon for money market mutual funds and the net asset valuations. It could be that certain government and institutional MMF's will not have a floating NAV due to possible "run on assets" federal officials are concerned about. This is important because MMFs have been a large part of short term investments for many global companies. #MMF regulations - SEC changing rules on NAV and floating price - TBD.
Updated 2/2015. You can download recently updated reform rules: "SEC Adonpts Money Market Fund Reform Rules"
Liquidity
36% companies report cash balances increased year over year from the 1st quarter of 2013 to 1st quarter of 2014.Less than 25% of companies reduced cash holdings.
What has built up cash balance?
- 73% have greater operating cash flows
- 18% are taking on debt – spending not in cash.
What has reduced cash balances?
- Increase capital spending
- Decreased cash flows
- Retiring pay off debt
- Acquisitions and new operations
investments
- Stock repurchases and dividends - push
share prices up
Currently 70% of short term investments are stashed in maturities less than 30 days.
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| Cash flow Momentum Velocity Depth & Capacity |
The Past 12 Months
Interestingly, the past years trend differs slightly for companies that are net investors versus net borrowers, (financing growth can come from debt or equity). 40% of investors increased cash reserves compared to 28% of borrowers. These results can be seasonal as well as a reflection of the company's economic environment.60% of companies studied hold cash overseas, usually where the cash was generated. Recent cash valuation from CFO.com point out the real value of corporate cast stashed overseas (Restricted Cash) is not on par with IFRS. Logically, growing markets need funding whether internal or debt oriented. 75% of publicly owned companies hold cash abroad while a third of these has at least half of their cash overseas. The study reveals larger companies are more likely to have more cash outside the US. This may be attributed to the necessity for more liquidity to cover global expenses and operating costs for expansion in emerging markets.
Looking Forward
Forecasts for the next year indicate over 75% of responding companies expect cash levels to increase as a result of growth in operating cash flow while (17%) accredit a better cash conversion cycle and (16%) a decrease in capital spending. Companies expecting a decrease in cash levels believe decreases will be the result of increased capital expenses, (25%) paying down debt and (24%) from acquisitions. While less that a quarter of the respondents (22%) expect a decrease in cash due to a decrease in operating cash flows.Overall, the largest majority of respondents foresee an increase in cash from operating cash flows. The minority cite better short term AR/AP management, and changes in capital expenditures. For those companies anticipating a decrease in cash holdings the majority attribute an increase in capital expenditures, retiring debt, and acquisitions.
How do companies invest in the market when 70% are in maturities under 30 days?
Corporate Investment Policy Statement (IPS) is a written document that outlines the details of the company's plan for putting cash in specific vehicles that may include cash deposits, treasuries, commercial paper, and others like money market funds.
Many larger companies and those that are net investors are more likely to also include a cash fund for liquidity, separate from invested short term cash deposits.
Priorities in 2014
- Safety (68%)
- Liquidity (28%)
- Yield (4%)
The order above is a direct result of the ultra-low interest rate environment. These numbers and priorities will change as the Fed exits the QE program and subsequently begins to increase the federal funds rate.
Permissible Investment Vehicles
If we look into the chart on page 13 of the report you can see how different companies, i.e. public, private, net borrower, net investor, and companies under or over a $1 Billion in revenues choose to invest. Companies have different needs and plans that should be reflected in the way they invest or borrow. For example, companies with revenues over $1 billion invest more in Treasury bills than companies with under $1 billions in revenues. This is based upon the surveys percentage of respondents. The same appears to be true for net investors when compared to net borrowers.So who do you think would invest more in the short term, a public company or a private company?
How Can an Investment Policy Statement Diversify?
Many companies have a limit on the types of vehicles that can be used in the short-term. The limits will keep the funds distributed in order to minimize risk and yet offer liquidity. As the chart below indicates, the variety of investment vehicles can be extensive or limited not only in choice of vehicle but also the percentage of the portfolio.Looking at the chart below, 62% of companies surveyed have a provision in their IPS that allows for 50% or more of their short-term investments to be in a bank deposit account. That could be a ton of cash. What it does not tell us is that the funds may be distributed to several or many different banks in different geographical centers which would offer another level of diversification.**
**This was a suggestion to distribute funds to prevent a lock-out in AFP's Risk Survey for 2013
Allowable Percentages
AFP thanks RBS Citizens and Citizens Bank for underwriting the 2014 AFP Liquidity Survey. The Research Department of the Association for Financial Professionals designed the survey questionnaire, analyzed the survey results and produced the report and is solely responsible for its content.
*Association for Financial Professionals
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Bethesda, MD 20814
www.AFPonline.org
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