Hoarding big sum may not be wise
Source: Agencies |
May 31, 2012, Thursday
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Print Edition
Print Edition
ELITE companies in Europe and the United States are hoarding US$1.2 trillion of cash on their balance sheets, potentially missing opportunities to cut debt, reward faithful investors or accelerate their growth, a survey yesterday showed.
In its Annual Working Capital Management Survey, auditors Ernst & Young found 2,000 of the largest US and European firms were keeping the sum - nearly 7 percent of their aggregated sales - unnecessarily tied up in working capital, on fears of a fresh credit squeeze or economic downturn.
"While there have been signs of corporate confidence in the global economy, macro-economic uncertainty in Europe has left many businesses and financial institutions cautious on financing and growth," said Jon Morris, head of working capital management at Ernst & Young for Europe, Middle East, India and Africa.
"Now's the time for companies to challenge their working capital performance and seek effective strategies to free up excess cash from the balance sheet to reduce net debt, fund growth or business transformation or even return value to shareholders," he said.
Efficient working capital management ensures a firm has sufficient cash flow in order to meet its short-term debt obligations and operating expenses.
But poorly managed cash flows due to either a surplus or lack of working capital are harmful to a company.
A surplus can be eroded by inflation, while a shortage of capital leaves companies short of a safety net and vulnerable to collapse if demand for their products nosedives or the cost of raw materials rises sharply.
US-based companies cut their cash holdings by 3 percent annually in 2011 as their domestic economy rallied but European firms were reluctant to trim theirs, the survey showed.
In its Annual Working Capital Management Survey, auditors Ernst & Young found 2,000 of the largest US and European firms were keeping the sum - nearly 7 percent of their aggregated sales - unnecessarily tied up in working capital, on fears of a fresh credit squeeze or economic downturn.
"While there have been signs of corporate confidence in the global economy, macro-economic uncertainty in Europe has left many businesses and financial institutions cautious on financing and growth," said Jon Morris, head of working capital management at Ernst & Young for Europe, Middle East, India and Africa.
"Now's the time for companies to challenge their working capital performance and seek effective strategies to free up excess cash from the balance sheet to reduce net debt, fund growth or business transformation or even return value to shareholders," he said.
Efficient working capital management ensures a firm has sufficient cash flow in order to meet its short-term debt obligations and operating expenses.
But poorly managed cash flows due to either a surplus or lack of working capital are harmful to a company.
A surplus can be eroded by inflation, while a shortage of capital leaves companies short of a safety net and vulnerable to collapse if demand for their products nosedives or the cost of raw materials rises sharply.
US-based companies cut their cash holdings by 3 percent annually in 2011 as their domestic economy rallied but European firms were reluctant to trim theirs, the survey showed.
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