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Over the last few years, many of the largest companies in America have been keeping their large cash reserves on the sidelines due to the economic uncertainty of the modern market. Estimates place the amount of sidelined cash at anywhere from $1.5 trillion to $2.8 trillion, a considerably large sum being stockpiled due to a variety of factors, including the European debt crisis, the US recession, extremely low interest rates, severe market fluctuations, unpredictable commodity prices, and unsettled political situations in a variety of countries around the world. Of course, even with so many factors combining to influence CFOs to play it safe with their cash reserves, there is just as much incentive to deploy that money in a safe, effective way and put it to work, while maintaining the precious liquidity necessary in the unpredictable modern market. Due to all of these factors, and the general economic climate, CFOs are leaning more than ever toward conservative options for their corporate cash deployment strategies.

Financial Safe Havens

  • According to a Deloitte survey in 2012, almost 60 percent of CFOs in the United States reported substantial to high use of US Treasuries as a key part of their investment portfolios. The reason for their popularity is two-fold. First, they are backed by the US government, which most still consider to be extremely safe despite the 2012 debt downgrade by Standard & Poor’s. The second reason is that US Treasuries tend to rally in bad financial times. For CFOs, treasuries offer a safe place to put corporate cash, and a compromise between leaving cash on the sidelines and investing in more risky propositions.

    Based on the same survey, CFOs are also partial to other investments backed, either directly or indirectly, by the US government. Bank deposits, backed by federal deposit insurance, were reported as a popular corporate cash deployment option among 50 percent of CFOs. Investments in money market funds, which often invest considerably in government bonds, were reported to be used substantially or highly by 48.3 percent of CFOs. All of this says that CFOs tend to see government-backed investments as a safe and appealing option in the modern economic climate.

Riskier Options

  • Not surprisingly, with the conservative nature of current CFOs, options like commercial paper, stock repurchase agreements and corporate bonds are being used less heavily, coming in at 9.3 percent, 7.9 percent and 19.3 percent respectively. Issuing dividends is another option, but many CFOs avoid it because dividends will become expected yearly after they are issued once. Some academic experts suggest that investing in small- or mid-sized companies which are having trouble obtaining credit, along with new in-house projects, is an effective method of corporate cash deployment that will benefit the greater economy. It is also, of course, more risky than choosing government-backed options. CFOs earmarked 9.6 percent of cash reserves for domestic investments in late 2011, with expected growth of 9.9 percent in 2012.

Overall, corporate cash deployment strategies tend to vary based on the condition of the economy, a variety of external factors, and the risk-tolerance of CFOs. The bottom line is that liquidity is still the name of the game, with CFOs reporting that they planned to hold about 25 percent of cash in reserve in 2012. For the money that they choose to investment, many companies are opting for the benefits of overseas havens. Even this strategy has its perils, with uncertainty about future tax rates on investments. The general consensus for now seems to lean heavily toward conservative investments, though that can be expected to change as external issues become more settled, and growth resumes.

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