Companies U.S. Cash Balances Reach Historic Highs and Expected to Remain High According to New AFP Survey

Organizations seek higher yields through use of trading portals and other tools while not pursuing new projects or acquisitions with their available cash

July 27, 2006 - BETHESDA, MD - U.S. businesses increased or maintained their U.S. cash balances in the past six months, reaching historically high levels, according to a new survey by the Association for Financial Professionals (AFP) and underwritten by Credit Suisse Asset Management. Further, treasurers and other financial professionals expect that their organizations will maintain their U.S. cash balances over the next 12 months, suggesting a perceived dearth of opportunities to invest in new projects or acquisitions.

Fueled by a sustained period of strong earnings growth, as well as the ability to repatriate foreign earnings under the American Jobs Creation Act of 2004, fully 40% of organizations reported holding a larger U.S. cash and short-term equivalent balance in May 2006 than six months earlier, according to the AFP survey. Looking forward to the next 12 months, more than a quarter (27%) of respondents expect to hold larger cash balances, while nearly half (49%) expect to maintain their cash balances.

"The amount of cash and cash equivalents a company keeps on hand can be seen as a barometer of how corporations view the economic climate and the opportunities they perceive for investing in new projects or acquisitions," said Jeff Glenzer, Director of Treasury Services of the AFP. "While the strong business climate has helped increase cash balances, companies are not moving as quickly to re-invest this cash in their businesses. Further, possibly due to uncertainty about some of the accounting rules defining cash equivalent investments, or narrowly defined investment policies, organizations are not necessarily taking full advantage of the opportunities to generate returns from their cash balances."

While most organizations are guided by a written cash investment policy, one-in-five organizations have no written rules governing investment selection. Further, most organizations are far less diversified than their policies allow. The typical organization is allowed to invest in about eight different types of investment vehicles, but, according to the survey, on average, organizations currently use three of the choices available - money market funds, bank deposits, and commercial paper.

A small minority of respondents currently permit investments in cash plus funds, enhanced cash total return vehicles or ultra-short total return vehicles. Organizations using cash plus funds typically expect better than an eight basis point advantage when using cash plus funds over money markets.

In addition to looking for higher-yielding investments, many organizations report that they are trying to lower the costs associated with managing and administering a short-term investment program. One of the tools that can help accomplish this goal is a short-term trading portal. One in four companies (24%) report they are using an electronic, multi-family trading portal to execute at least some of its short-term investment transactions. Organizations using trading portals move an average of 69% of their money market fund holdings through the trading portal.

Among other key survey findings was a trend toward seeking greater efficiency in cash management, including the use of outside advisors. A quarter of organizations use an outside investment manager to administer some portion of its short-term portfolio.

"The findings from the AFP Liquidity Survey will help to establish a baseline awareness of current U.S. cash investment practices and provide new ideas leading to improved investment performance and/or risk reduction," said John Winters, Director of Credit Suisse Asset Management. "We are confident that practitioners will benefit from a clearer view of industry practices that will either confirm their current approach or serve as a catalyst for consideration of different approaches used by their peers."

The 2006 AFP Liquidity Survey was undertaken by the Association for Financial Professionals in May 2006. A total of 342 treasury and finance professionals from a broad range of public and private companies responded. Companies involved in the survey ranged from annual revenues of $50 million to over $20 billion and included a variety of industry classifications.

The complete results of the survey can be viewed at www.afponline.org/research

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The Association for Financial Professionals, headquartered in Bethesda, Maryland, supports more than 15,000 individual members from a wide range of industries throughout all stages of their careers in various aspects of treasury and financial management. AFP is the preferred resource for financial professionals for continuing education, financial tools and publications, career development, certifications, research, representation to legislators and regulators, and the development of industry standards.