Is Cash Really King?

Press Release: November 8, 2011 FAYETTEVILLE, Ark. (November 8, 2011) – Take cue Apple. Holding on to too much cash can be perilous for business enterprises, not the least design firms. An article in the Nov. 7 issue of The Zweig Letter, ZweigWhite’s weekly management publication, reveals that architecture, engineering, planning and environmental consulting firms are holding more cash than ever – and it might not be a good thing. According to the most recent data available from the Federal Reserve, non-financial companies were reporting more than $2 trillion on their balance sheets at the end of the second quarter of 2011, more than at any time in 50 years. Cash accounted for 7.1 percent of all company assets – everything from buildings to bonds; the highest level since 1963. A recent survey by global financial services firm Credit Suisse revealed that the ratio of cash to total company assets is reaching a 45-year peak at 5.96 percent. Cash reserves offer protection against tough times. Cash on hand gives companies more options for future growth. But it also can create some problems. “Each firm has its own unique set of circumstances and the cash position must be determined by evaluating their specific needs,” said Albert Cuisinot, CFO of Degenkolb Engineers in San Francisco, Calif. Cash position is set by capital needs, growth forecasts, anticipated distributions and maintaining a healthy balance sheet with reasonable cash reserves. “Tax implications for our industry also play a factor – holding more cash can be expensive,” Cuisinot said. “I prefer a thoughtful, balanced approach. CFOs always like to have cash, but they also need to be mindful of the shareholders. Investing in new markets, services or geography will help to insure continued success – it’s like R&D is to some industries.” Engineering and architecture firm MSA Professional Services in Barbaroo, Wis., is a financially conservative company, and doesn’t keep a large amount of cash on hand, said CFO James Hendricks. As a “C” corporation, the firm is on a cash-accounting basis; holding excess cash would promote a tax liability MSA may not wish to have. “We dispense of what cash we have at year’s end in the form of bonuses or preferred distributions to (the company’s) ESOP Plan, in order to avoid paying taxes on these amounts,” he said. “Paying off debt and repurchasing stock from retiring shareholders requires ‘after-tax cash.’ Beyond that, we do not believe in holding cash purely for the sake of holding a nest egg for a rainy day or to create some kind of comfort level.” Hendricks also says holding as little cash as necessary puts the pressure on to perform, but it does require a few things including a good banking relationship, a healthy bottom line, a steady approach to managing accounts receivable, and a cash flow plan. For more information about The Zweig Letter visit www.Zweigwhite.com/trends/thezweigletter