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AFP Survey: Better Operating Cash Flows Mean Bigger Reserves

  • By Staff Writers
  • Published: 7/14/2014
Corporate treasurers and CFOs continue to build their organizations’ cash reserves in response to improved operating cash flows, according to data released Monday by the Association for Financial Professionals.

According to the 2014 AFP Liquidity Survey, underwritten by RBS Citizens, 36 percent of companies reported rising cash reserves in the last year. Among those that increased cash holdings, 73 percent indicated that bigger reserves were the result of better operating cash flows. AFP conducted the survey in May 2014, generating 740 responses from senior finance and treasury.

“The survey takes the pulse of financial managers, and shows the challenges and opportunities they face in the current environment,” said Matt Richardson, Senior Vice President and Head of Product Solutions at RBS Citizens and Citizens Bank. “There are definitely signs, such as higher operating cash flow, that could be indicating change and rising optimism in the marketplace.”

Less than a quarter of respondents reduced reserves last year. The main reason for any cash shrinkage was an increase in capital expenditure, which was reported by 43 percent of those that reduced cash. That number was up from 32 percent in last year’s survey, and 30 percent the prior year. Other reasons for trimming cash were to retire debt (28 percent), fund acquisitions or launch new businesses (20 percent), and/or repurchase stock or pay out dividends (20 percent).

“The pace of economic recovery will determine cash decisions,” said Jim Kaitz, AFP’s president and CEO. “Many companies will continue to pile up cash until they see business prospects significantly improve, but even today, we are seeing many forward looking companies using their cash to invest for the future.”

Meanwhile, just under half of organizations with operations outside of the United States expanded their non-U.S. reserves. Most companies opted to leave their non-U.S. balances overseas either for reasons of unfavorable tax treatment at home, operational necessity or business opportunities in a particular region.

Companies are sticking to ultra-conservative investment strategies with their short-term holdings, with 75 percent of all short-term investments maintained within three vehicles: bank deposits, money market funds, or U.S. Treasury securities. That’s because safety is the prime objective for corporate cash, with more than two-thirds of companies saying they seek safety first, compared to 28 percent that seek liquidity.

A full 52 percent of corporate cash holdings are maintained in bank deposits, the largest percentage reported since AFP began its Liquidity Survey series in 2006. Bank deposits are attractive because companies are uncertain about future changes in money market fund regulation, and many banks allow corporate customers to defray service fees through Earnings Credits on cash holdings, and the Earnings Credit Rates (ECR’s) on those holdings are slightly higher than prevailing interest rates on similar short term investments.

Download key findings from the 2014 AFP Liquidity Survey on

View an exclusive CNBC interview with AFP President & CEO Jim Kaitz here.

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