One of the fundamental tenets of investment is the relationship between risk and potential return.
The lower the risk the investment, the lower the return and, conversely, the higher the risk, the higher the potential return. Thus Treasury Bills, blue chip corporate bonds, and FDIC insured deposits, all relatively risk free investments, yield next to nothing for a return (outside of some peace of mind, which is indeed valuable these days!). While small cap stocks, speculative investments and the like, with loads of risk, tend to offer investors the possibility of solid, even spectacular returns.
I hardly need to belabor this point as it is a rock-solid, investment 101, unquestioned, immutable truth!
As Acorda Therapeutics Inc., Chief Executive Ron Cohen said in a WSJ article today regarding his company's $228 Million in cash and cash equivalents,
"spending cash now is risky, because interest rates could rise as a result of the downgrade, making capital more expensive.[Acorda] keeps most of that money in U.S. government debt and money markets, producing an average yield of "significantly less than 1%."
But, he added, "It's much more important for us to preserve capital than get a high rate of return. In this environment, it's impossible to get a high rate of return without exposing the capital to risk."
Clearly, Mr Cohen is reflecting the widely held truth that low risk=low return, high risk=high return and never the twain shall meet!
But is that really true? Is it true that there is no way for companies to put their stockpiles of cash to work earning them a far better return than "significantly less that 1%" annually. While that is a Truism, it is not an absolute truth, and there is a notable exception available to corporates today to deploy their cash...
- ...In a risk free, short term investment
- ...For very high returns (anywhere from 5% - 45% APR)
- ...to the benefit of their supply chain and thus their business
By utilizing the cloud based technology of Discount Pro(TM) and the Ariba Network(TM) dozens of companies today are able to discover, connect and collaborate with their suppliers over cash flow needs and cash return opportunities. These companies are finding that by offering to pay their suppliers early in exchange for a discount, they are able to:
- Deploy their cash in a completely risk-free, short term investment by simply paying a liability (their payable) early. There is no risk as the return is achieved the moment the cash is deployed and the discount is taken.
- Acheive significant returns in the form of discounts equating to an average of ~24% APR for deploying cash 30, 45, or 60+ days early.
- Reduce the liquidity risk in their supply chains by strengthening their supplier's cash flow and lessening their dependence on credit (early payment to suppliers lowers DSO and provides cash without using debt!).
Certainly, the vast majority of traditional safe havens for the piles of cash companies have today will follow the truism that low risk=low return and will yield "significantly less than 1%". But there is an exception, and exceptional companies are earning some exceptional returns on their cash through collaborative cash flow tools like Ariba's Discount Pro(TM).
Are you missing out on your risk free rewards?