We use cookies to provide you with a better experience. If you continue to use this site, we'll assume you're happy with this. Alternatively, click here to find out how to manage these cookies

hide cookie message
RSS FeedFinancial Planning

How much longer can companies run themselves for cash?


UK companies are sitting on a surplus of £752 billion

Article comments

In the early days of the financial meltdown, way back in 2008 when auditors were presumed to be having 'a good crisis', Goldman Sachs bankers still thought they were doing 'God's work' and Greece had an A credit rating, a powerful mantra quickly gained currency among finance chiefs. That mantra was 'cash is king'.

At the time, companies were caught up in the maelstrom sparked by the bursting of the US housing bubble in 2007 and the sub-prime loan contagion that was crippling the financial sector.

In autumn 2008, as giants of the banking world such as the Royal Bank of Scotland and Lloyds either trembled on the edge of the abyss or, in the case of Lehman Brothers, plunged right down into it, markets were seized with panic and credit dried up overnight.

The ready cash that had financed the mergers and acquisitions of the boom years prior to the crisis was consigned to the history books. The unthinkable had happened. Banks were closed for business and companies were on their own.

"In bigger companies, a lot of corporate treasurers were quite badly scarred by the crisis," says Rob Donaldson, head of M&A and private equity at Baker Tilly. "They were in the situation where they had a lot of short-term debt that they thought they would be able to easily roll over when the time came. But when the time came, it wasn't easily rolled over."

The sheer shock of not being able to access vital funding when it was needed left a deep psychological imprint on many finance teams. But although 'cash hoarding' is seen as a defensive response to the crisis, many companies had already been building up cash reserves for several years beforehand to finance planned acquisitions.

The crisis simply accelerated this trend and forced companies to view their cash piles less as an acquisition war chest and more as a liquidity lifeline. The Office for National Statistics figures reveal that by September 2011, UK companies were sitting on a cash pile of £752 billion – six times the UK's annual budget deficit.

Much of this cash is concentrated in the coffers of the corporate giants, with non-financial FTSE 350 companies holding £160 billion or more in cash at the end of each quarter last year, according to consultancy Absolute Strategy Research – more than double the amount they were holding five years previously.

And it's not a trend that's confined to the UK. Euro zone companies have squirrelled away a tidy €1.94 trillion. Meanwhile, across the pond, US consumer technology giant Apple has built up a $98 billion cash mountain all by itself.

Siege mentality

It has reached a point where at face value companies have so much money sloshing about on their balance sheets that they don't know what to do with it. And with cash producing a lousy return of 1-2 percent, well below the 10-15 percent return on capital that they would normally hope for, hoarding it doesn't make sense.

After all, companies exist to do things, not to sit on money – making money on money is a bank’s job. "Not many companies like sitting on mountains of cash," says Donaldson. "But they don’t find it easy to do anything else at the moment."

David Petrie, head of the ICAEW's corporate finance faculty, agrees. "Normally it wouldn't be regarded as good working capital management," he says. "In theory, capital should be deployed in growing the business or it could be responsibly paid out to shareholders."

So why aren't companies spending?

John Grout, policy & technical director at the Association of Corporate Treasurers, says that efficiency has now become "a habit" with companies of all sizes remaining "suspicious" of the financial sector.

Share:

Recommended Articles

Comments

Britain Loans said: Its never a bad time to start up a business and never let recessions put you off If venturing into an e commerce business i would recommend patience and wait until your site has been thoroughly tested before launch a little bit of pre launch publicity will not hurt although try to launch on the publicised date Find out what competition exists and where there might be opportunities and then market your business like mad

How much longer can companies run themselves for cash?
Financial Planning

Can finance rise to the challenge of major transformation?

Can finance rise to the challenge of major transformation?

Outdated finance processes, systems and competencies leave too many questions unansweredmore ..


ITV reports 40% half year profits growth

Online, pay and interactive hand broadcaster strong growthmore ..

Ryanair reports 157% profits leap and raises forecast

Total revenues rose 11% to €1.49 billion, the airline reported on Monday.more ..

Apple will 'set the world on fire' with iPhone 6 sales

Analysts anticipate an 'unbelievably massive' second half of '14 for a new, larger-screen iPhone, in part because Apple's committed a record $21B for components, tooling and manufacturingmore ..

Budget: What business wants

CFOs are keen for the chancellor to avoid any uncertaintymore ..

Stay ahead of the curve

CFOs used to low interest rates ignore working capital optimisation at their perilmore ..

Send to a friend

Email this article to a friend or colleague:


PLEASE NOTE: Your name is used only to let the recipient know who sent the story, and in case of transmission error. Both your name and the recipient's name and address will not be used for any other purpose.



In Depth
Can finance rise to the challenge of major transformation?

Can finance rise to the challenge of major transformation?

Outdated finance processes, systems and competencies leave too many questions unanswered more ..

In Depth
Interim CFO or consultant? The pros and cons

Interim CFO or consultant? The pros and cons

Ed Harding offers an insight into the life of an interim CFO and the advantages in driving transformation more ..

Advertisement

* *