OK, so the Rhyme of the Ancient Mariner reference in the title may be a bit obtuse, but the fact is that corporate ships across the US, UK & Europe are awash in a sea of cash, the return on which is so poor it has left them thirsty for more.

 

The US Federal Reserve yesterday released it's quarterly report on US Corporate cash holdings.  According to the Fed, US companies are now holding $2.12 Trillion in cash and cash equivalents (liquid, less than 1 year investments) on their balance sheets.  This is yet another new record and represents the continuation of a trend of quarterly records that has been going on for some time, accelerated of course since 2008 and the start of the Great Recession.  The same is holding true for European & UK corporations as well, with the latest numbers showing that Eurozone corporations hold ~1.94 Trillion Euro and UK companies holding 750 Billion Pounds Sterling!

 

Given the current economic turmoil and uncertainty in the Eurozone and the broader worldwide economy, it is not surprising that companies have built up a cash pile as a hedge against this uncertainty.  In fact, in this Reuters article, Economist Jeff Greenberg says that "The notion of 'fool me once shame on you, fool me twice shame on me' is fully reflected in corporate balance sheets."  In other words, those companies who weathered the last few years and labored to free up cash flow from their operations are not going to be caught again without a sufficient cash buffer to weather the next financial storm.  As a result, corporate cash balances don't appear to be going anywhere anytime soon...Treasurers and CFO's like the security and safety of such ready liquidity.

 

The problem is that all that cash is just sitting in financial institutions and short term liquidity investments earning next to nothing.  According to the December, 2011 Quarterly Corporate Cash Survey from Treasury Strategies, inc., corporations in the US are holding almost 75% of their total liquidity in overnight investments, money funds and bank deposits.  And per Bloomberg.com, the predominant indices for these short term investment returns are all at all time lows with the Fed Funds rate sitting at 0.08%, 1 Month Libor at 0.28% and 3 Month Libor at 0.54%.  In fact, with the announcement today by the European Central Bank (ECB) that they are returning their index rate to it's historic low of 1%, pretty much every low risk, short term liquidity investment option (under 12 months tenor) is earning less that 1% annually! 

 

So why are Treasurers keeping so much cash in liquidity vehicles that earn them next to nothing in return (save Earnings Credits against their bank fees)?  Because after being burned and struggling to stockpile their cash over the last few years, Security of that capital is key. In a recent WSJ article, Samuel Strickland, CFO of Booz Allen Hamilton reflected this thinking when he said his firm is keeping its cash in safe instruments like U.S. Treasurys, even though they are “yielding almost nothing,” because the “mission is not to lose principal." Even so, Strickland "says some of his company’s investors are getting antsy for management to put its cash to better use or return it to shareholders."

 

It makes perfect sense that companies are holding large amounts of cash, given the high levels of economic uncertainty. And it is a sound strategy to put that cash into short-term, very low-risk investements that first and foremost ensure that the principal is maintained.  Those investments may not yield anything, and there may be pressure to get better return on that cash from investors, but bottom line they protect their liquidity.

 

But what if there were a short-term investment of cash that had absolutely no risk to principle associated with it and also yielded double-digit annual returns on cash invested there? 

 

Sounds like a pipe-dream, I mean everybody knows from investment 101 that yield follows risk and term of investment.  The risker or longer term the investement, the higher the expected return.  By contrast, the shorter the term and lower the risk, the lower the return on investment (e.g. overnight deposit rates of .08% APR).  But there is indeed one such short tenor investment opportunity for corporate cash that is completely risk-free and is currently yielding anywhere from 8% - 24%+ APR to those companies now taking advantage of it.  It's called Dynamic Discounting and the investment is in their own supply chain.

 

At it's root, dynamic discounting allows companies to take advantage of the opportunity created when an invoice is approved significantly sooner than it is due to be paid, by making that approval visible to their suppliers via an online portal and giving them the opportunity to ask for or accept an offer of accelerated early payment in exchange for some level of discount.  This provides a greater return on cash to the buyer for the period deployed (e.g. 30 days early payment is like a 30 day investment of cash) while reducing DSO and providing much needed liquidity to the supplier. 

 

In fact, Ariba customers using Ariba's Discount Pro (TM) solution on the Ariba Network (TM) are capturing an average of $2 Million in early payment savings for every $1 Billion of targeted spend, at an average return on their cash of 18% APR. A risk-free return, I might add, as it simply invests cash to remove a liability early. And since this savings and return is based on an investment in their own supply chain and providing liquidity to suppliers who need/want it, not only is the investment risk free, but it actually REDUCES liquidity risk in their supply chain.  Surely that investment beats letting cash sit idle in bank and money market accounts!

 

And suppliers love it!  One media-related supplier using the accelerated cash flow to hire more staff so they can add more releases to their product faster and so gain more business states that "the value of accelerated cash flow to us far outweighs the cost."   While another supplier to a large sports products company said , "With Ariba electronic invoicing, we get our invoices paid as quickly as four days, and the visibility into payment status is like gold."

 

Let's see, risk-free, short term investment for cash?  Check. Double digit annual returns?  Check.  Reduced supply chain risk?   Check.  Suppliers eager to participate?  Check.   Sounds like the makings of a great cash investment plan to me.   For corporate treasurers and CFO's looking for a better way to deploy some of their strategic cash reserves over the near term for a better return without risk to their principle, there is no better investment than their own supply chain.