Real-Time Payments

Many of you are probably familiar with near instantaneous money transfers using Venmo or Paypal. And while we discussed next-day ACH transactions in the textbook, in 2017, an interbank payment system was unveiled, the real-time payment (RTP) network. While only 130 banks out of the more than 9,600 financial institutions in the U.S. have adopted the system, these adopting banks cover 60 percent of demand deposit checking and savings accounts. Several challenges have prevented the adoption of the RTP system. For example, businesses do not seem to be concerned about speeding up payments by one day, especially in the current low interest rate environment. The biggest hurdle appears to be infrastructure, but expect this hurdle to be reduced when Jack Henry & Associates and Fiserv come online later this year. But the RTP system does provide other perks, including 24/7/365 access, instant confirmation, and settlement finality, meaning the sending bank can't revoke or recall a payment.

Corporate Cash Holdings Increase And Decrease

In a recent survey by the Association for Financial Professionals, 40 percent of companies increased cash holdings in the first quarter of the year, but 34 percent of companies reduced cash holdings. The 34 percent decrease in cash holdings is the largest in the survey history dating back to January 2011. Compared with the same period last year, 22 percent of companies have lower cash balances, while 43 percent have large cash balances. What these numbers indicate is uncertain. It could be that the reduction in cash balances is due to cash flow problems, or companies could feel more confident in the future and reducing excess cash.

Cash Balances Increase

The old expression "cash is king" is often followed by corporate treasurers, especially when the economic outlook is uncertain. In the 2019 Cash Management Survey, 42 percent of companies increased cash balances, while only 22 percent reduced cash. Additionally, 62 percent of companies are net investors, with only 38 percent are net borrowers, another indication of a fight to cash. One significant issue found in the survey was that more companies experienced a decrease in operating cash flow during 2019 compared to 2018, an indication of why corporate treasurers are becoming more conservative.

Corning Wins Cash Gold

Corning recently won the Gold Award in liquidity management from Treasury & Risk. In 2015, the company announced its Capital Allocation Framework, designed to reduce its $5.5 billion in cash by one-half. The company generates one-third of its revenue in Asia, which is where much of the cash was tied up. Thanks to the formation of the Shanghai Free Trade Zone, Corning was able to pool its cash, allowing for more flexibility in cash management. Better cash management practices have allowed Corning to reduce its cash balance to about $1.2 billion as of June 2019.

2018 Alexander Hamilton Awards

The 2018 Alexander Hamilton Awards from Treasury & Risk have been announced. The gold award went to Herc Rentals, which set up a treasury group to sales for a billion-dollar company less than six months after its divestiture from Hertz. The silver award went to Avery Dennison which centralized its European treasury functions, resulting in significant savings, and improved foreign exchange processes. Finally, OpenText was awarded the bronze award for streamlining its treasury and setting up processes for the integration of future acquisitions.

Commercial Paper Issuance Falls

In March 2016, an average of 95 AA-rated companies issued commercial paper per day. On March 29, 2017, only six such companies issued commercial paper. The reason behind the dramatic decline in commercial paper issuance is regulations enacted by the SEC to reduce risk in money market mutual funds. Historically, all money market funds had a net asset value (NAV) per share of $1. If the NAV dropped below $1, it was known as "breaking the buck" and had only occurred a limited number of times. In 2008, the Reserve Primary Fund became the largest money market fund to break the buck. In an attempt to reduce risk, the SEC changed the rules for institutional money market funds that means the NAV of these funds will not be pegged at $1. The result was a flight from institutional money market funds, reducing the availability of these funds as customers of commercial paper. This has made it more difficult for companies to raise short-term debt.

Corporate Overseas Cash Grows

The cash held by foreign subsidiaries of U.S. companies has reached a record $2.5 trillion. Microsoft and GE both hold more than $100 billion overseas, while Apple and Pfizer have $91.5 billion and about $80 billion, respectively. Overseas cash now tops cash held domestically, which reached $1.94 trillion. Of course, much of the reason for the foreign cash holdings is the U.S tax system, which taxes repatriated earnings at 35 percent, the highest corporate tax rate in the world. Although various tax breaks on the repatriation of cash have been floated, naysayers argue that the last repatriation tax break in 2004 resulted in little investment. Rather, repatriated cash was used for dividends and stock buybacks. We should point out that a repatriation tax break would actually be a boon to the IRS. Consider, if the repatriation tax rate were lowered to 15 percent, companies would only get $.85 for every dollar repatriated. Assuming a 35 percent personal tax rate, investor would only receive about $.55 in dividends after tax per dollar repatriated, an effective tax rate of about 45 percent.

Companies Plan To Decrease Cash

In the second quarter of 2015, S&P non-financial firms held $1.4 trillion in cash. And the percentage of companies that increased cash and short-term investments was expected to increase in the fourth quarter of 2015. However, a recent survey indicates that more companies are expected to decrease cash in the first quarter of 2016 than companies that increase cash balances. Overall, Treasurers appear to be doing very little with cash, waiting to see what happens in October when the SEC's new money market rules take effect.

Negative U.S. Interest Rates?

Back in March, we posted about negative interest rates in Europe. And while recent speculation has centered on the Federal Reserve increasing interest rates, at least one member of the Fed has pushed for negative interest rates. Narayana Kocherlakota, president of the Minneapolis Fed, has advocated for the Federal Reserve implementing negative interest rates in the U.S. Although Kocherlakota is a non-voting member of the Fed, he has been joined by other Fed officials arguing for negative interest rates. An extra mattress for your savings account is looking more appealing.

Apple's Cash Hoard Grows

Apple's cash balance, which has been enormous by any measure, topped $200 billion for the first time. Cash held internationally has reached 89 percent, or about $180 billion, of Apple's cash. Apple has been reluctant to repatriate the money back to the U.S. as it would be forced to pay the full 35 percent corporate tax rate on the repatriated money. In an effort to pay investors, Apple has issued $50 billion in debt in various currencies around the world.

Overseas Cash Continues To Grow

Eight of the largest U.S. tech companies increased overseas cash balances by $69 billion last year. In fact, overseas cash held by U.S. firms grew to $2.10 trillion during 2014, up 8 percent from 2013. The high U.S. tax rate is the reason for the cash holdings, although several companies took a tax hit in 2014 to repatriate earnings. For example, Duke Energy repatriated $2.7 billion in foreign earnings, but paid $373 million in taxes to do so. GE still has the largest offshore cash balance, at an astounding $119 billion.

How Low Can Rates Go?

With companies holding record amounts of cash, banks may be reporting record earnings as the Commonwealth Bank of Australia estimates that about one quarter of bank deposits worldwide are earning negative interest rates. Switzerland and Denmark lead the pack, with savings account rates of negative .75 percent. Previously, zero percent was seen as the lower bound for savings rates, but some analysts argue that the new lower bound is considerably lower than negative .75 percent.

U.S. Corporate Overseas Cash Grows

U.S. corporate cash balances held overseas have reached $2.1 trillion, a 600 percent increase over the past 12 years. In comparison, the domestic U.S. corporate cash balance is $1.9 trillion. The major reason for the growth in international cash balances is the U.S. tax policy that taxes repatriated profits at the difference between the local tax rate already paid and the U.S. corporate tax rate, which is one of the highest in the world. Repatriating overseas cash does not necessarily mean the cash will be used for investment. One study indicates during the 2004 tax holiday, every dollar repatriated generated an $0.80 dividend payment and $0.15 share repurchase. While politicians may decry the lost corporate tax revenue that arises with a repatriation tax holiday, personal income taxes balloon with the increased dividends and share repurchases. 

Corporate Cash Balances Rise

At the end of 2013, nonfinancial U.S. corporations held $1.64 trillion in cash, a 12 percent increase from 2012. Apple's cash hoard reached $158.8 billion, or about 9.7 percent of all corporate cash assets. Additionally, U.S. based multinationals have $1.95 trillion outside of the country. Much of the increase in international cash balances was driven by Microsoft, Apple, and IBM.

Japanese Yen Holdings

Much has been made of U.S. corporate cash balance, which reached $1.925 trillion in December 2013. However, Japanese companies have a larger cash balance at 224 trillion yen ($2.15 trillion). The large cash holdings by Japanese companies is attributed to a 15-year deflationary period. Prime Minister Shinzo Abe is encouraging companies to raise wages faster than the cost of living to help end deflation in Japan.

The Check Is Not In The Mail

According to the 2013 AFP Electronic Payments Survey, about seven percent more companies are using electronic payments for business-to-business (B2B) payments than were using electronic payments four years ago. Overall, about 50 percent of companies use electronic payments of some sort for B2B payments. Surprisingly, more companies with sales under $1 billion use electronic payments than companies with sales over $1 billion. The increase in the number of electronic payment users may not reduce overall float since the electronic payment may be made later than it would be with a check, but "The check is in the mail." may no longer be a viable excuse for late payments.

Reasons For Holding Cash

John Maynard Keynes identified three theories as to why firms hold cash: the speculative motive, the precautionary motive, and the transaction motive. In 1980, firms had about 12 percent of total assets in cash. By 2011, this number had jumped to 22 percent. There are several factors that have lead to this increase. For example, low inflation has lowered the opportunity cost of cash. Additionally, much of the cash horde is held overseas. Bringing the cash back to the U.S. would result in large tax liabilities. However, recent evidence suggests that the previous experience of managers may be the key factor. CEOs who have experienced financial difficulties are likely to hold more cash than CEOs who have not experienced financial difficulties, a nod to the Keynes' precautionary motive.

Cash Management And Transfer Pricing

Now that you know all about cash management, you are ready to pool the cash from the divisions of your company, even if they operate in different countries. One thing you must consider first is transfer pricing. Transfer pricing is the cost charged by one division of a company to another division of the company for goods or services. The transfer price is the price that would be charged by an outside, or arms length, entity. If the transfer is between divisions in the same country, the tax implications (other than state and/or local taxes) are minimal. However, if the divisions are in different countries, transfer pricing becomes important with regards to taxes. A recent article in Treasury & Risk  highlights some potential pitfalls in cash pooling for divisions in different countries. Cash management transfer pricing presents problems because cash pooling generally results in a higher interest rate earned on the combined deposits than the rate that would be received on on individual deposits. Similarly, any borrowing is generally less expensive. Additionally, there is the fact that the parent company should receive compensation for the time, effort, and expenses put into pooling the cash. As you will read, a number of factors affect transfer pricing when pooling cash from divisions in different tax jurisdictions.

Cash Balances Increase

The cash held by U.S. corporations has increased to record $1.79 trillion. Even with the increase, companies have been using cash to pay back shareholders. Companies paid a fourth-quarter dividend record of $79.83 billion and repurchased $99.15 billion in stock. One interesting fact is that even though U.S. corporate cash holdings are at a record, it only represents 11 percent of GDP, up from 10 percent of GDP in 2000. In contrast, European companies cash holdings typically represent to 14 to 20 percent of the corporation's home country GDP. Overall, 44 percent of finance executives expect cash balances to increase even further in the next six months.

Does Apple Really Have $121 Billion In Cash?

At the end of September, Apple reported a cash balance of $121.25 billion. But does Apple really have a savings account with that balance? Yes and no. While Apple's worldwide cash balance is $121.25 billion, the company only has $38.65 billion in the U.S. For the 600 U.S. multinationals that report cash balances held overseas, about 60 percent of the cash is overseas. Johnson and Johnson reported a cash balance of $24.5 billion, but the company holds essentially no cash in the U.S. The reason companies have not repatriated overseas earnings is that these funds would be subject to a 35 percent tax rate. The effect is to reduce a company's liquidity and ability to pay dividends or repurchase shares. For example, Emerson Electric recently borrowed money in order to pay dividends, repurchase shares, and make debt payments and pension contributions in spite of the fact that the company reported a cash balance of $2 billion.