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What to do with the cash? 17 Oct 2011

There's no news value in the revelation that - collectively, at least - companies have maintained very healthy balance sheets through this recession. Stung by the speed of the dot-com crash and related downturn in 2001, corporates have been hoarding cash aggressively since 2002 as a bulwark against unexpected catastrophes. (It's no co-incidence that theories like the Black Swan has come to prominence in the same period. CFOs know only too well that the risk that kills you is the one you couldn't foresee.)

But the level of cash on corporate balance sheets is getting... well, silly. According to Credit Suisse, it's now $3.3 trillion (£2.2trn) globally, and research firm Treasury Strategies puts the UK figure alone at a mighty £780bn. Across the Eurozone, there's nearly €2trn in cash sitting on corporate balance sheets. That's enough to make up for the government deficits of the entire Eurozone for about six years. Although, of course, given the breathing space, the governments would probably just spend even more money. UK corporates could plug the capital black hole that threatens the Eurozone banking system about four times over.

But, it turns out, those hair-brained ideas might actually be a pretty good use for all that cash. Because, frankly, where else do you FDs put it? You can forget yield (as the Economist has recently pointed out in an excellent article). Mitigating losses used to be a question of chucking it into government treasuries - but even sterling is facing doubts about its AAA rating. So the best corporates are hoping for is not to lose too much of their dry powder.

FDs in private equity backed businesses rarely face this problem. In leveraged deals, the whole point is to carry debt on the balance sheet, pay it off and sell up to get the big equity multiple. In the (rather more common these days) "operationally leveraged" deals, you need that cash to invest in new businesses, expansion and competitiveness. PE GPs - and their LPs - haven't given you loot just to sit on it making marginal post-inflation losses. They want growth.

So perhaps corporate FDs need to learn a thing or two from their mid-market PE brethren. Start splashing the cash. Invest in assets - intangible and physical - to lay the foundations for the next 20 years. We're never going back to any kind of notion of what "business as usual" was, so it's imperative to get some options in play if you're going to be a leader in the near future. That spreads money through the system - via suppliers and buying up or investing in smaller, disruptive companies - and hopefully boosts the economy for everyone. Get stuck into corporate venturing. Open up that new R&D centre. Lend some of the cash into your supply chain or customer base.

Because sitting on it is wasting it. In the current environment, governments are going to lose it for you, inflate it away or take it off you. Use it - or lose it.