The Overabundance of Cash in Corporate America: A Problem?

It seems basic: cash is good, right? In the last several years, some companies have gone from having virtually no cash to having too much cash. While the average person may think that having cash on hand is a good thing, when it comes to businesses, especially corporations, having too much cash on hand can be a bad thing.

Having enough cash in the bank to cover potential problems is definitely a good thing. Reserves can cover all kinds of expenses: unexpected lawsuits, accounts receivable that are on the books, and even payroll if need be. However, the sign of a healthy company is usually that available cash is not sitting in the bank.

The big problem with Credit Suisse's recent survey is that the ratio of cash to total company assets is reaching a 45-year peak at 5.96%, which could cause problems for a burgeoning world economy. Companies normally try to keep cash to a minimum because one of the lowest investment returns is interest from a bank. Usually funds that are dispatched to other places (be it stocks, bonds, other investment opportunities, or the like) have a higher return, which positively impacts shareholders and the overall economy.

It seems that more and more companies are becoming "cash hoarders", organizations that choose to keep larger than necessary cash reserves.

This impacts the economy in multiple ways. On the positive side, dividends can be quickly and easily issued, and organizations are able to invest in large-scale cash projects.

However, there are several problems with having this much cash on hand. For one, it is a sign that companies aren't bringing on more personnel or investing in their current work force. In addition, it implies that cash isn't being invested in new technologies or equipment, which influences the rest of that industry through slow business for providers. Overall, according to Neal Soss, chief economist at Credit Suisse, "The persistent accumulation of cash, as opposed to investment in new equipment and technologies, is not conducive to long-term growth".

Pundits argue that several large corporations are skewing the metric, and that realistically, cash is being put to work. It's hard to know for sure which is more accurate because of offshore investing and the overall exact cash distribution. One thing is for sure: unemployment is still high and the number of jobs created is barely keeping up with new entrants to the job force.

What companies will do with their cash excess remains to be seen, but it will be interesting to see how cash is utilized in the near future.

Resource:

http://www.cnbc.com//id/42308953