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Research Shows Largest Companies Hoarding Cash While Small Firms Starve for Capital

August 31, 2011 (SmartPros) The 1,000 largest public companies in the U.S. now have $853B in cash reserves, driven by borrowing, lack of confidence in market and other factors.

The largest U.S. companies are hoarding tremendous amounts of cash at present, in many cases borrowing to do it, while smaller companies remain starved for capital, according to newly-released working capital research from REL Consulting, a division of The Hackett Group, Inc.and CFO Magazine.

According to the REL/CFO research, the 1000 largest public companies in the U.S. had $853 billion of cash reserves at the end of 2010. Cash reserves have risen by over 6 percent since 2009, by 33 percent since 2008, and by nearly 75 percent since 2005.

According to the research, high cash levels are being driven in part by lack of confidence in the market, and concerns over market and demand volatility as the global economy continues to recover. In addition, there are few high-yield investment alternatives available at present. In some cases, companies may also be reserving cash in anticipation of M&A activity.

Surprisingly,  it appears that borrowing is also a significant factor behind the high cash reserves, particularly for AAA-rated companies. Total debt at these companies has increased by more than 30 percent over the past five years. According to the research, companies may be borrowing to get cash on their balance sheets simply because the cost of borrowing is low. At the same time, small cap companies, where much of the current economic growth is, are starved for capital right now. The research recommends a win-win solution: Large companies can potentially offer faster payment terms to smaller suppliers to help inject cash, in exchange for a small price discount.

Improvement in working capital management are not a major factor in rising cash levels. Companies' ability to collect from customers, pay suppliers, and manage inventory improved by only 2 percent in 2010, on the heels of a major deterioration in 2009. Most of the improvement is attributable to revenue growth, according to the REL/CFO analysis. Companies' ability to collect from customers was flat in 2010, as payables performance improved slightly and inventory levels shrank.

The research found that U.S. companies now have $780 billion in excess working capital, which represents over 30 percent of their total. Top performers now collect from customers 19 days (44 percent) faster than typical companies, pay suppliers over 10 days (41 percent) slower, and maintain over 23 days (77 percent) less inventory on hand.

A complimentary download of the REL/CFO 2011 U.S. Working Capital Research is available, with free registration, at:

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Source: REL Consulting

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