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US firms to decrease cash holdings due to worsening business performance

The effects of the COVID-19 pandemic are forcing many US businesses to tap into their cash reserves, according to the Association for Financial Professionals (AFP) Corporate Cash Indicators (CCI), a quarterly survey of senior corporate treasury and finance executives. While more companies in the past quarter increased their cash holdings than decreased them, the reasons behind either of these directions suggest turbulent times ahead.

Fully 32% of businesses plan to reduce their cash holdings in the coming quarter. This was shown in the forward-looking indicator, which increased 7 points from last quarter’s reading of -15 to -8. Only 24% of businesses signalled an intention to increase cash in the coming quarter, and their reasons for doing so are largely defensive.  

This follows a trend that began over the past three months, which saw 28% reduce their holdings. Very few companies are deploying cash to grow their businesses; instead, they are doing so primarily due to a deterioration in business performance, and corresponding reductions in cash inflows. Slightly over one-fourth of companies who reported decreasing cash balances did so to reduce debt.   

Meanwhile, 48% of organisations accumulated cash in the second quarter, primarily as a defensive measure. The quarter-over-quarter index reading was +20 and the year-over year indicator was +29. Some of those cash increases were due to the Payroll Protection Program (PPP), while few respondents indicated that cash increased due to improved performance.

The CCI measure for short-term investment aggressiveness at -17, signalled a continued conservative emphasis on safety and liquidity over yield. This highlights the elevated levels of concern among financial professionals and the unease with the current economic environment.

The results are based on 156 responses from senior treasury and finance professionals this quarter.

“Fallout from the COVID-19 pandemic has caused treasury and finance leaders to resort to measures they never thought they’d have to,” said Jim Kaitz, president and CEO of AFP. “Ideally, we want to see companies deploy cash to invest in their business and grow the economy. In this case, they seem to be doing so to remain viable.”

Economic conditions normalising?

Elsewhere in the US, at the end of Q2, the Citizens Business Conditions Index has shown surprising stability (decreasing only from 60.8 to 60.3) as government actions appear to have reversed the U.S. economy’s trajectory.

There is still considerable uncertainty about the third quarter and beyond, especially as COVID-19 cases surge in several states, but the end of the second quarter showed marked improvement over March and April.

“The pandemic-induced shutdown of the global economy was one of the most sudden drops we have ever seen in business activity and employment, but the unprecedented response by the government and the Federal Reserve was just as swift,” said Tony Bedikian, head of Global Markets for Citizens Commercial Banking. “With that stimulus, we saw a steady turnaround in markets. There is still a lot of uncertainty - and that will likely continue until there is a vaccine - but the government and Fed acted quickly to try to soften the economic blow and help bridge companies and consumers to the other side of this crisis.”

The Index is derived from a number of underlying components, most of which improved or held steady over the course of the second quarter. For example:

  • The Manufacturing and Non-Manufacturing Purchasing Managers’ Indices (PMI) from the Institute of Supply Management (ISM) were up for the quarter after a steep drop-off in April as many businesses reopened in May or June. Some of the uptick in manufacturing can be attributed to manufacturers repurposing their operations to meet demand for pandemic-related products.
  • Employment decreased overall during the second quarter, but wage growth ticked up as the pandemic tended to result in the loss of more lower-wage jobs.
  • Proprietary measures of business activity among Citizens Commercial Banking’s more than 7,000 clients across the United States were basically flat with some sectors improving and others still languishing.

The Index draws from public information and proprietary corporate data to establish a unique view of business conditions across the country. An index value greater than 50 indicates expansion and points to positive business activity for the next quarter.

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Cash & Liquidity Mngm in North America
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