Cash Buildup Not Knee-jerk Reaction


    While critics have raised alarms about the rising cash holdings on corporate balance sheets, there are broader, long-term reasons for the move to cash that go far beyond a knee-jerk reaction by business to current economic uncertainty, says the report ‘Not Dead Yet: The Changing Role of Cash on Corporate Balance Sheets’ from the C.D. Howe Institute. Corporate cash holdings have increased in waves over the past quarter-century in response to changing economic conditions and business process improvements, says Finn Poschmann, vice-president of research at the institute. He says that while corporate cash as a share of assets has risen in the past decade, the share of other, non-income-earning current asset components, such as inventories and accounts receivable, has significantly fallen. Businesses appear to have been responding to long-term trends in economic conditions, including enhanced business processes that have shrunk inventories, by better managing their balance sheets.