Cash challenges for CFOs


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Large cash balances in today’s volatile economy create new challenges for CFOs.

The amount of cash sitting on large corporate balance sheets is cause for considerable envy.

Governments searching for ways to stimulate growth and smaller companies desperate for finance would no doubt give quite a bit to see that money released into investments.

But large cash balances in today’s volatile economy create new challenges for CFOs.

Cash that would once have been earmarked for acquisitions and other strategic ventures is now lying idle and earning tiny returns in low-interest instruments. To keep cash at the ready in the event of a downturn, companies are avoiding long-term investments.

And since the downgrading of many prominent banks over recent years, even traditionally secure short-term investments instill less confidence than they did previously.

Below we list six strategies for CFOs confronted with this scenario:

Invest, pay out or buy back

Ultimately, cash-rich companies face a choice. Either they can invest their surplus cash and put it to productive use, or they can return it to shareholders in the form of dividends or share buybacks. For now, companies seem to be favoring the latter.

Share buybacks can help to shore up asset prices in the short term. Companies that have fared well during the downturn and do not trust the other available investment instruments might well choose to back their own company’s profits by buying back shares.

Articulate the rationale for your cash-rich position to investors

"Companies need to articulate their story clearly and explain to shareholders why they are sitting on that pile of cash," says Les Clifford, Chair of EY's CFO Program in the UK and Ireland. "Very often, companies are not clear enough about the rationale for their balance sheet position, and that creates uncertainty and concern among the investor base."

By communicating regularly with investors about their perceptions of their markets, and how their financing decisions reflect that, CFOs can build h3, long-term relationships with shareholders based around a clear premise of no surprises.

Lock in finance at record rates in a golden era for bonds issuance

For CFOs of investment-grade companies in countries with a relatively sound economic footing, it has never been easier or cheaper to sell bonds. Investors need to find a safe haven for their cash, and this has brought down borrowing costs to unprecedented levels.

While it may be counter-intuitive for cash-rich companies to issue bonds that will further bolster their cash reserves, some CFOs of cash-rich companies are doing just that, to lock in finance at historically low rates.

Develop a clear treasury risk management strategy

Over the last few years, the role of the treasury department has seen a shift in focus. No longer are treasury professionals expected to find ways to create wealth and profits – instead, there is a real focus on identifying and mitigating risk.

The governance of treasury management has come to the fore, with many companies putting in place clear policies and strategies to ensure that the board and audit committee are comfortable with the risks being taken.

Support your supply chain

A cash-rich company does not necessarily have cash-rich suppliers.

Many large companies are reliant on a small number of key suppliers within their supply chain. If one of those providers becomes insolvent, then the company may be unable to get its products to market or even to operate.

Keep your eyes open to M&A opportunities

There is currently little sign of a major uptick in corporate M&A activity.
With slow growth predicted in the global economy for some time to come, few companies have the appetite — or see the urgency — for major M&A deals. But this cycle will eventually turn, and the cash-rich companies will be the ones best placed to move quickly and acquire prime assets.


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