by Stephen McPhie, CA
Partner, RSD Solutions Inc.
Many companies are hoarding cash at present. Apple is a prime example with over $80 billion of cash. This indicates that businesses are reluctant to go on buying sprees of targets that might seem cheap at the moment but might become cheaper in coming months. It also indicates that they are keeping reserves in place in case the global economic situation continues to deteriorate. These factors also make them more reluctant to return cash to shareholders in the form of dividends or share buy backs. Normally it is considered inefficient for companies to hold large cash balances as they reduce returns to shareholders. However, the foregoing illustrates that there are good reasons at present for companies to hoard at least a certain prudent amount of cash.
Of course, U.S. companies also have the problem of “stranded cash” (or “trapped cash”); that is cash held in foreign subsidiaries, which is very tax-inefficient to repatriate.
High cash balances in a company should beg certain questions, especially in the current climate. In what is it invested? What currencies is it invested in? How liquid is it? Is it earning the best return possible? Even investments that were recently considered very low risk need to be focused on right now. Is your company investing enough additional time and expertise in managing cash? Does your Board of Directors take an interest?
The risks are huge and we have certainly seen companies with growing and substantial cash balances that are not beefing up their investment strategies, risk management, controls and oversight accordingly. Some can manage to these issues internally. Others could use outside help for a very modest expenditure in relation to the risks and possible downsides they face. Doing nothing more than has been done before seems particularly unwise.
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