DAVID GUSTIN, Chief Strategy Officer, The Interface Financial Group

August 13, 2019

The popular opinion has been that many large American companies are flush with cash. In fact, surveys from some reputable institutions support this view. The AFP’s corporate cash survey found during the second quarter of 2019, U.S. businesses continued to build their cash and short-term investment holdings. This is intuitively supported by events like the corporate tax cut last year.

But this narrative is highly misleading. First, 5% of S&P 500 companies hold more than half the overall cash; the other 95% of corporations have cash-to-debt levels that are the lowest in data going back to 2004, according to Wells Fargo research. We know who those 5% are — they are Google, Amazon, Facebook and Apple.

Second, a recent Goldman Sachs analysts review of S&P 500 companies balance sheets found they are returning cash to shareholders at an unsustainable rate.

Buybacks and dividends are outstripping cash flow for the first time since 2008. The research found that during the past year, nonfinancial companies in the S&P 500 have seen their cash levels decline by $272 billion, and a 15% decline represents the largest drop since at least 1980, according to a Goldman analysis. Another worrying sign is that the cash decline has coincided with a spike in corporate debt levels, with gross debt outstanding rising 8% over the same period.

Goldman analysts found S&P 500 share repurchases have continued to surge in 2019, and although S&P 500 repurchase authorizations have declined 20% versus the year-ago period, companies retain capacity to repurchase stock under multiyear authorizations.

And this is the big boys, but with corporate debt exploding in the leveraged loan market (which is a proxy for the middle market), we know most of these companies are net borrowers.

Tying this Back to Supply Chain Finance

Thinking that companies have free cash to invest in their supply chains through dynamic discounting or self-financed supply chain finance programs is assuming without evident facts. If companies do not have surplus operational cash, then using their own cash for early pay finance is unlikely. In addition to a lack of free operating cash, there are other reasons a company may not want to commit its cash:

1. 1. DPO Reduction of Aggressive use of Early Pay — A concern about committing their own cash in a material way to fund their supply chain impacts DPO negatively.

1. 1. Cash Commitment — Companies understand funding suppliers early is not something to do one month but not the next. It is a commitment.

1. Treasury Lacks Incentives — The reward structure for treasury does not provide an incentive to be aggressive with early pay solutions. Companies, and the people who run them, are very rational. If there is no clear incentive to do so, they will not pursue early pay solutions.

The Need for a Flexible Funding Model

Flexible funding enables a company to have an “option.” Fund early pay finance with your own cash if and when you want, with whatever currencies you want or use a third party. If you have seasonal or unexpected cash needs, you can turn off the self-funded option and have the funder provide early payment to your suppliers. If you are flush with cash at your Canadian entity but not in the U.S., you can fund your Canadian suppliers but use a third-party solution elsewhere with one button. That’s how easy it should be.

Some companies may consider a bank line of credit, but that adds to debt levels so this may not be a preferable option.

When considering dynamic discounting solutions, it seems imperative to have a third-party solution as a flexible option. Because, while it seems intuitively large American companies are cash-rich via surveys, surveys can be misleading.