Cash and a buffer against difficult times

There is an old saying that “profit is a matter of opinion, cash is a matter of fact.”

How true this is as the economy staggers into a damaging recession. Well known high street retailers, airlines, numerous soccer clubs, farmers, suppliers to the building trade and multi-national car manufacturers have all been featured in the media recently as examples of “cash strapped” businesses whose future is in doubt because of rapidly draining cash balances.

Businesses across the board are actively looking for ways to conserve cash balances and improve their cash flow. From offering discounts for up-front cash purchases, cutting unnecessary overheads, lowering stocks of unsold products, to scaling back capital spending and curtailing share buy-back programmes, there are many ways that businesses can preserve their cash reserves - most businesses go just because they run out of cash not because they are loss-making.

It will come as precious little relief to businesses on the edge - but the Financial Times today publishes a list of some of the world’s biggest listed companies and their net cash position. Net cash is defined as cash and short-term investments or marketable securities minus debt.

The results are fascinating - three of the top four are Chinese banks with a total net cash between them of over £270bn. Berkshire Hathaway led by Warren Buffett is well out in front - indeed it has four times the net cash of a company such as Apple ($24.5 bn).

Here is the top ten:

Berkshire Hathaway $106bn Bank of China $101bn Ind and Comm Bank of China $89bn China Construction Bank $81.5bn Exxon Mobil $28.2bn China Mobile $25.7bn Apple $24.5bn Cisco Systems $19.9bn Microsoft $18.7bn Google $14.4bn Ninendo $11.0bn Roche $9.9bn

The Ft reports that

“Twenty of the largest listed companies in the world are sitting on a combined cash-pile of $570bn (£390bn), demonstrating how some of the world’s biggest groups retain substantial firepower in the current downturn.”

This includes the firepower to make corporate acquisitions given the steep fall in share prices…....but above all it acts as insurance against business failure in such difficult economic times. In a recession - liquidity is king and queen all rolled into one.

Financial Times

Companies hoard cash against harder times