Companies risk harm from cash glut: survey

LONDON Tue May 29, 2012 7:12pm EDT

LONDON (Reuters) - Elite companies in Europe and the United States are hoarding $1.2 trillion of cash on their balance sheets, potentially missing opportunities to cut debt, reward faithful investors or accelerate their growth, a survey on Wednesday showed.

In its Annual Working Capital Management Survey, auditors Ernst & Young found that 2,000 of the largest U.S. and European firms were keeping the sum - equivalent to nearly 7 percent of their aggregated sales - unnecessarily tied up in working capital, amid fears of a fresh credit squeeze or economic downturn.

"While there have been signs of corporate confidence in the global economy, macro-economic uncertainty in Europe has left many businesses and financial institutions cautious on financing and growth," said Jon Morris, Head of Working Capital Management at Ernst & Young for Europe, Middle East, India and Africa.

"Now's the time for companies to challenge their working capital performance and seek effective strategies to free up excess cash from the balance sheet to reduce net debt, fund growth or business transformation or even return value to shareholders," he said.

Efficient working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses.

But poorly managed cash flows resulting in either a surplus or shortage of working capital are potentially harmful to a company.

A surplus can be eroded by inflation, while a shortage of capital leaves companies short of a safety net and vulnerable to collapse if demand for their products nosedives or the cost of raw materials rises sharply.

Companies based in the United States managed to reduce their cash holdings by 3 percent year-on-year in 2011 as their domestic economy rallied but most European counterparts remained reluctant to trim their stockpiles, the survey showed.

Since 2002, the strongest and most productive U.S. and European companies have cut their cash hoardings by 16 percent but the rate of working capital improvement is beginning to wane, Ernst & Young said.

Over the last three years, this rate has stagnated in both regions, while average annual gains were approaching 3 percent in the previous six years.

"Despite the demand and desire for European corporates to improve their cash performance, these businesses are having to manage the impact of a number of key drivers in order to achieve this," Morris said.

"While improved financial technology can enable improvement; the volatility of demand, risk of customer default, leaner and less flexible supply chains, the physical distance created by shared service centers as well as sheer geographical spread of businesses today mean that managers need to be smarter and more integrated to release cash in a sustainable way."

(Reporting by Sinead Cruise; Editing by David Cowell)

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Comments (2)
mulholland wrote:
Corporations are prudent. Governments are not.

May 29, 2012 7:49pm EDT  --  Report as abuse
Cashflowguy wrote:
After reading the E&Y article, I think you mean to say that companies have $1.2 trillion unnecessarily tied up in working capital ….not that they have that cash actually sitting on the balance sheet. The report states also that US companies since 2002 have reduced their Cash Conversion Cycle and working capital needs by 16%…NOT that they have reduced the actual cash they are holding and hoarding…these are very different things. All of the Fed reports show that the actual cash on the balance sheet (cash on hand in short term deposits and liquidity investments) are continuing to go UP. The E&Y report focuses on cash locked up in working capital, not on cash being held on the balance sheet.

May 31, 2012 11:04am EDT  --  Report as abuse
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