Companies are still building up their cash balances mainly due to fears of another liquidity crisis. That’s according to a new survey from SunGard. Other reasons for the continued cash build up include better working capital management and the fact that there are fewer places to invest cash, the survey revealed.
“Uncertainty and fear of more credit shocks are forcing companies to stockpile cash,” said Vince Tolve, a VP at SunGard and head of the company’s SunGard Global Network’s (SGN) Short Term Cash Management Portal.
According to the survey, 37 percent of companies increased the amount of surplus cash they held, a third of which had seen a significant increase. Aside from the environment, and better working capital management, companies cited cost reductions, release of trapped cash, delays in capital expenditure, or M&A and divestments as other factors boosting surplus cash growth.
The survey also noted that with the coming end of federal deposit insurance for corporates – the so-called Transaction Account Guarantee or TAG program – companies will be shifting cash into money market funds. This is despite the looming threat of changes to MMFs that might make them unattractive to corporates, most notably a possible switch to a floating net asset value regime. Mr. Tolve speculates that it will be some time before changes to MMFs come about, and lacking alternatives, companies will continue to favor MMFs.
The other attraction to MMFs, Mr. Tolve said, is that they are “the most automated of all the short-term instruments.” In other words, many assets, like bank deposits and the like, are still done over the phone. Therefore, keeping track of MMF holdings is much easier to do. The automation is also scalable; in the never-ending lean, do more with less treasury environment scalable technology is key. Treasurers are “controlling more cash with fewer resources,” Mr. Tolve said. “It’s a lean environment so you need the scalability” that technology can offer.
In this department, products like SunGard’s SGN short-term cash portal can help. It allows companies to deal directly with the banks they choose and facilitates the transaction from start to finish and updates it directly to the general ledger. “It’s a great from a control perspective,” Mr. Tolve said. “It’s centralized into one platform and it’s completely auditable.”
Among the surveys other revelations is that companies are still centralizing (likely due to better technology). Still, some companies are sending a few functions back to regional centers that have the local expertise. This is a trend seen among several members of the NeuGroup peer groups that want more “boots on the ground” when it comes to a better functioning remote location.