TORONTO, Jan. 16, 2013 /CNW/ - While critics have raised alarms about the rising cash holdings on corporate balance sheets, there are broader, long-term reasons for the move to cash that go far beyond a knee-jerk reaction by business to current economic uncertainty, according to a new report from the C.D. Howe Institute. In "Not Dead Yet: The Changing Role of Cash on Corporate Balance Sheets," Finn Poschmann finds corporate cash holdings have increased in waves over the past quarter-century in response to changing economic conditions and business process improvements.
"The critics' outcry over corporate cash hoards, which has gone so far as to accuse business of malfeasance, is mistaken," commented Poschmann. "A closer look suggests more to the story."
Poschmann finds that while corporate cash as a share of assets has risen in the past decade, the share of other, non-income-earning current asset components, such as inventories and accounts receivable, has significantly fallen. "Businesses appear to have been responding to long-term trends in economic conditions, including enhanced business processes that have shrunk inventories, by better managing their balance sheets," said Poschmann. "Businesses have been shoring up financial assets to match liabilities, in part for precautionary reasons; there is no economic problem or market failure to be addressed and, accordingly, no policy action indicated in response," noted the author.
Poschmann provides in-depth evidence for his argument in data going back to the 1950s, which show that businesses, overall, are keeping less inventory on hand for reasons that range from the global shipping container revolution to better management information systems and just-in-time delivery methods. These changing business conditions, along with a precautionary approach to economic headwinds, tell the real story, said Poschmann. "Assets held in cash-like forms, which earn interest, and provide cushions against unexpected events, can fund future investments and are a lot less dormant than holdings in inventories and accounts receivable, which typically have zero returns."
SOURCE C.D. Howe Institute