The AFP’s Corporate Cash Indicators® third quarter results reveal that U.S. treasurers are amassing higher-than-average cash reserves. According to the AFP, organizations planned to accumulate cash upon entering the third quarter; however, that cash could be exiting their coffers at higher rates than initially forecast. Similar cash accumulation rates are projected to continue.
What’s most peculiar about this particular revelation is that it comes at a time when businesses have also reported a struggle to drive corporate growth. Different environmental dynamics—including rising globalization, unpredictable market volatility, and the steady emergence of disruptive technology and competition—contribute to these sluggish growth rates.
Examining these two seemingly conflicting—yet concurrent—trends, what can we learn about why organizations are foregoing cash investments in lieu of further accrual? There may be two reasons for this: organizations are hoarding cash out of fear of economic/market volatility or they simply lack the insights necessary to determine the best place to allocate resources for long-term growth. In either case, strategic planning and the right technology are the answer.
Strategic planning for long-term business performance
For financial planning and analysis (FP&A) groups, strategic planning is a key process that can help an organization achieve mid- to long-term financial and business objectives. In addition to developing a roadmap that can better steer business performance, the practice of strategic planning enables organizations to make better-informed decisions around the desired cost discipline and resource allocation needed to achieve its objectives.
For treasurers, a cash surplus typically translates into an opportunity to invest money back into the business. This is typically achieved through operational costs or capital expenditures (capex), share buyback opportunities, mergers and acquisitions, or reconciling debt obligations. And while treasurers are not often making the final call to deploy the cash (that decision is largely left up to the company’s CEO or CFO), they do shepherd the process by managing balance sheets and cash flow forecasting metrics and maintaining optimal levels of liquidity, debt to equity, and cash flow.
What would it mean if a treasurer was holding onto cash when there was an opportunity to invest it for a return rate of, say, 20 percent? Put simply, it would contradict the purpose of the finance function, which is to plan for and support such capital expenditures and investment opportunities (among other things). Thus, if there are scoped and defined projects that clear the corporate internal rate of return (also known as the hurdle rate), the corporate officers have a fiduciary responsibility to allocate funds to their most useful and profitable purpose.
Are the signs pointing to a strategic breakdown?
Political insecurity, shifting tax policies, and a lingering spike in interest rates have added to the likelihood of future uncertainty. With this increasing market volatility and complexity, the question becomes this: How might new advances in technology enable executives to find, analyze, and invest in capital projects with confidence? After all, with most mid- to long-term investments of cash shaped heavily by an organization’s strategic plan, this vacillation between hoarding and investing could point to a breakdown in strong strategic planning capabilities.
For organizations, the practice of strategic planning needs to encompass more than just the process itself—it needs to align people, processes, and technology toward a shared goal of strategic, data-driven decision-making. And with the steady evolution of the finance function—and the rise and rise of the digital CFO—FP&A teams have to push the envelope of change.
Capital expenditures that are not effectively utilized represent a missed investment opportunity. However, finance teams can better capture these opportunities through tighter inter-organizational collaboration, sophisticated and capable planning technology, and an operational capacity that allows them to focus on high-impact strategic activities.
With the necessary data, insights, and long-term business objectives, FP&A teams can become a catalyst of change—rather than its steward. An enterprise planning platform can help finance teams better collaborate closely with the business, allocate capital efficiently, and continuously forecast to achieve short- and long-term financial objectives. It can also support the larger objective at hand: to shift FP&A resources toward achieving the highest value activities and to partner effectively with business stakeholders.
Without the right capabilities, collaboration, and operational capacities, an organization can still find it difficult to confidently determine where to deploy capex for optimal ROI. But with the resources in place—and visibility into the investments that can generate high-value returns year-over-yea—organizations might become more willing to loosen the purse strings and confidently spend more cash in these periods of uncertainty.