Money To Burn? | For some companies, having extra cash on hand can be a perplexing issue
As problems go, having too much cash isn't the most terrible thing. Still, as the economy continues to founder, and some firms put off big moves like acquisitions or major capital investments, some companies are trying to figure out the best way to manage their cash.
John Brisebois, a wealth strategies adviser with Richard B. Mood CPA in Westborough, said the factors contributing to uncertainty are different for different types of businesses. A mom-and-pop pizzeria might have $10,000 or $15,000 stashed away in case next year is a slow one in the local community, he said. A large corporation might be more concerned about what federal tax rate changes will look like, or about the financial drama playing out in Europe.
Brisebois said his business clients are mostly pretty small, and few of them have big cash reserves to worry about. Among those that do, he said, some may be putting it into CDs, despite the current low interest rates.
If inflation is a concern, he said, a good move might be buying hard assets. That’s particularly true for manufacturers that have a use for raw materials and can, for example, buy lots of copper and stockpile it for future use.
Michael Mulrain, CFO of Worcester’s Polar Beverages, said his company isn’t particularly worried about managing liquid assets.
“We, unfortunately, are not sitting on lots of cash,” he said.
Mulrain said Polar has been “somewhat bullish,” buying a Georgia manufacturing facility from Winn-Dixie Deep South Beverage this past April. He said acquisitions seem to be less expensive now than they were five years ago.
“The feeling is a lot of companies have built up cash on their balance sheets and you’d think maybe there’d be a lot of acquisitions going on,” he said.
Uncertainty Persists
Mulrain sees companies hesitating to make big moves because of uncertainty about regulatory issues, among other things. For example, he said, Polar has been worried about the long-running fight between Worcester and the U.S. Environmental Protection Agency over the city’s stormwater system. On the other hand, he said, borrowing costs are much lower, which makes it a good time for strong companies to extend themselves.
“It’s a fairly good time to look at acquiring businesses or expanding your business where you can, because your cost of capital is fairly cheap right now,” he said.
In fact, merger-and-acquisition activity is on the rise in the U.S., according to PricewaterhouseCoopers. The total value for such deals was up 39 percent year over year in the first five months of 2011, to $454 billion. The deals done between June 2010 and May 2011 were much more significant than those in calendar years 2009 or 2010, though still not up to pre-recession levels. The firm predicts further growth.
But some companies, particularly large corporations, have more cash on hand than they once had. The Federal Reserve reports that, as of June 30, non-farm corporations were holding more than $2 trillion in liquid assets, up 24 percent from one year prior.
Playing It Safe
Mulrain said companies that are building up their cash reserves are probably playing it safe with their investments, putting them into U.S. Treasuries or the bonds of top-rated corporations. He said that, although Polar buys various commodities in the course of business, he sees investing in commodities as a more likely choice for risk-seekers, such as hedge funds, than for typical businesses.
“I’m not sure that many companies with extra money would be investing that way,” he said.
Deb Larsen, senior lending officer at UniBank in Whitinsville, sees many of the mid-size businesses she works with waiting to hire full-time employees. But she said many of them are using temps and making capital investments.
“Really, there’s not much out there that’s paying any significant interest, so it wouldn’t make any sense to sit on a lot of cash,” she said.
Larsen said companies that do have money are better off with short-term strategies like “sweeping” cash from their accounts into overnight repurchase agreements, which offer reasonable returns along with maximum liquidity.
Larsen said Unibank is continuing to make a good number of loans for capital investment, expansion and acquisitions. “I think we all read all the negative press, but obviously the positive stuff doesn’t get to the forefront,” she said.
WBJ Web Partners
Most Recent
Most Recent
0 Comments