Without perfect visibility into current cash and future cash needs, there could be some difficult questions to answer about what your company plans to do with its excess cash.
I read a couple examples this week where eBay1
chose significantly different strategies to utilize their excess ‘mountains’ of cash. eBay chose to repatriate cash – to the tune of $9bn – as it felt that having USD available within the U.S. freed it to make acquisitions, most of which were domestic. Apple, on the other hand, again went to capital markets to raise $12bn to return to shareholders. This isn’t the first time Apple has felt that leaving cash outside the U.S. (and outside the IRS’s reach) was better for shareholders than bringing cash back to the U.S. from international markets (to emphasize the scale of this, Apple has $151bn in cash, of which 88 percent is held outside the U.S.).
While the strategies to utilize excess cash are quite different, what is similar between eBay and Apple is that they both face pressure from shareholders to put cash to use. Publicly-traded companies’ balance sheets can be viewed by anyone, and it doesn’t take a PhD in finance to know that cash on the balance sheet is far less valuable than a) using cash to fund M&A, b) using cash to invest in the business, or c) returning cash to their shareholders, who can undoubtedly find something interesting to do with it.
There are several lessons for corporate treasurers to take from this:
1) Global cash visibility is paramount to knowing how much cash is available and, just as important, where that cash is. With visibility into all corporate bank accounts on a daily basis, efficient decisions can be made to concentrate and deploy cash in optimal ways.
2) Forecasting cash is critical, as part of the answers your CFO and CEO need when asked by the board and investors what the plans are for those cash balances. If “saving for a rainy day” is part of the answer, one had better know exactly what day it will rain and precisely how much of a downpour is coming.
3) Maximizing direct and indirect returns on cash will be rewarded, since such strategies may make up part of an answer to the board and shareholders when executives are asked why cash balances are so high. Indecision by the CEO and CFO may be tolerated if cash is earning a return that is higher than shareholders could get if cash was returned to them. Strategies such as diversifying investment choices (leveraging money market funds, separately managed accounts, etc.) can be maximized if the treasurer can guarantee how long cash is available for investment, thanks to a superior forecast. Programs such as supply chain or customer finance can also generate higher margins and implied returns, while also benefiting working capital and supporting business operations. These are very collaborative and strategic initiatives that generate business value and recognition – all thanks to treasury!
If your organization has a healthy balance sheet thanks to significant cash reserves, you really have two choices:
1) Be reactive – and do your best to answer the inevitable questions about cash utilization that will come from senior management, after they themselves are asked the same questions.
2) Be proactive – by designing initiatives to optimize deployment and utilization of cash.
It goes without saying that the second option is the preferred one, unless you’re looking for a sudden career change. The increasing pressure from boards and shareholders to improve cash visibility and make the best use of cash is driving corporate treasury to look at more creative ways of using these reserves. Adopting a matra of Proactive Treasury Management, which is Kyriba’s message to the market, will propel your treasury team both personally and professionally.