However, our firm’s research has found that the primary reason most companies are hanging onto cash today is because they intend to use if for their operations. Some of the leaders in the technology market set the pace for these companies heavily laden with cash assets. Microsoft, for example, continues to pile up cash despite pressure from shareholders. The cash provides financial stability and flexibility unrivaled in the industry. It will fund large capital investments in the future as the technology sector inevitably changes and rivals, such as Google, expand. Cash also provides companies like Microsoft the ability to reward shareholders even when the earnings or profits slow down.

Treasury Strategies conducts annual U.S. corporate liquidity surveys to examine how companies are managing their cash and short-term investments (with maturities of less than three years). We study random samples that include both public and privately held companies ranging in size from those with revenues of more than $1 billion to those with revenues between $50 million and $1 billion. Most of them are based in the U.S. For our 2006 survey, we solicited approximately 5,000 businesses and received more than 650 responses. We found that overall liquidity grew 7.5 percent over 2005. Cash hoarding behavior varies considerably, however, at the individual-firm level. Nearly half (48 percent) of respondents had increased liquidity since 2005, while 27 percent reported a decrease. Those organizations that increased liquidity reported a total growth in their liquidity portfolios of 40 percent, while those that decreased liquidity reported a decline of 30 percent.

Cushions of Cash
The organizations that have increased liquidity have done so for three important reasons. First, companies have plainly improved efficiencies and cut costs, enabling them to extract more cash out of their working capital cycles.

Second, companies are raising liquidity levels to build up reserve funds. Our respondents indicated that a larger liquidity cushion helps ensure that they can continue their operations in the face of increased regulatory pressures. The Sarbanes-Oxley Act has forced companies to place greater emphasis on internal controls and reporting. In many cases, companies are maintaining extra liquidity as part of a more stringent risk management strategy. Perhaps this helps to explain why medium-size companies grew liquidity by 11 percent in 2005, while large organizations grew only 3 percent. Large organizations can afford many hours and dollars on Sarbanes-Oxley compliance reviews, while midsize companies tend to have fewer of these resources and may be weaving safety nets by maintaining larger cushions of reserve cash.

Third, companies are accumulating cash for future investments. In some industries that are experiencing rapid consolidation, such as telecommunications, organizations keep cash on hand to finance acquisitions that can be a competitive advantage. Alternatively, pessimistic companies that see a flat yield curve as a proxy for future return are stockpiling cash because they do not believe that today’s capital investments will pay off for them in the future.

Accumulating cash appears to be a trend with legs. Of those companies that told us they have increased their liquidity since 2005, nearly one-third of them expect to continue to grow these assets over the next 12 months. Within that group, 65 percent of respondents reported that their boosts will come from greater efficiencies within their operations, not from any deliberate buildup. Only about one-quarter of the companies that have increased liquidity said they planned to reduce their cash levels in the year ahead, putting it to good use for debt repayment, increased capital expenditures, share buy-backs or acquisitions. Apparently, shareholders who have been wondering why their favorite companies are hoarding cash will have many more opportunities to ask them why.

Chrystal Pozin is a principal with Chicago-based Treasury Strategies, a consulting firm specializing in treasury, liquidity, payments and working capital management.