“Lots” is ambiguous and subjective. Do any keep 6 months operating expenses in cash?
Roku, for example, is reported to have held $487 million dollars in cash at Silicon Valley Bank. Is that significant?
That’s about 2 months revenue for them. As they seem to be losing a significant amount of money, it’s less than that for operating expenses.
I assume that money was not money put aside from profit (as they don’t have one) to cover a rainy day, and more infusions of capital from investors to keep it afloat.
As I read it, the OP’s original question was not whether companies hold cash or not. It was whether companies hold dedicated cash for the sole purpose of eating those savings during downturns in preference to shrinking or simply going bankrupt.
IOW, he’s asking more of motive than of practice. It’s much harder to answer the motive question, but I’ll go out on a limb and say
Generally not for publicly traded corps. It’s far too economically inefficient to pass shareholder muster.
I’d agree. I would suspect that such a company’s investors would want to see that money getting a higher return on their investment than it would earn sitting in a bank or other low-yield (but very safe) instrument.
Well, it doesn’t necessarily need to be that narrow, although getting through tough times would be a big thing. The question was more like - savings for the same reason families keep savings. If a company wanted to launch a big project and had $10 billion on hand in cash, that would be a lot easier than borrowing or issuing stock or whatnot.
Apart from tech startups and other such companies with unusual erratic demands on their finances - if a publicly traded company accumulates a large amount of cash in the bank (or similar liquid assets) then they risk someone trying to buy out control of their stock so as to pay that nest egg out as dividends. The only gotcha is if there’s a major project or research that needs financing, although generally most projects like new factories tend to be built on borrowed money, with the cost of funding (interest) figured into the finance.
IIRC, A&P grocery chain was in decline, as was Greyhound, back in the day. But by accepted accounting principles, they carried their property on their books at the purchase price. However, properties acquired in the 50’s and earlier, usually in downtowns, had appreciated greatly and the books did not reflect these values. Entrepreneurial types (i.e. “raiders”) found this a hidden source of dividends to be released.
Barbarians at the Gate deals with a similar situation - RJR had a lucrative business swimming in excess revenue, and a stock price devalued due to the growing notoriety of cigarettes. Two groups created a massive bidding war to try to buy out the company to access and distribute those riches. In the end, they made existing shareholder richer.
I used to work for a company that needed to build production plants from time to time. they reported not so much their cash assets as their net debt. This was not so much bad, as managed. In good times, they paid down the debt. In bad times, they ran it up a bit so as not to have a wild swing in operations capacity.
As I recall, at one time they had a takeover poison pill that if an unwelcome group tried to buy them out, they could borrow a massive amount and pay existing shareholders so as to make a taken-over company more indebted, less lucrative.
It would only be “easier” if you ignore the difficulty of earning and storing the $10B in the first place.
Well-managed companies don’t do things based on what’s more administratively convenient. They do things based on what’s more profitable. Or, ref @md-2000 just above, other big considerations like takeovers, taxes, incumbent management job security, share price, etc.
That the clerks in Finance might have to work overtime to arrange a loan is not part of the decision matrix. Although as e.g. @Llama_Llogophile and some others upthread have said, for them administrative convenience is THE primary consideration of how they manage their money at the margins.
I don’t know about today, with a differently weird economy and after stock buybacks, but companies like Apple, Alphabet, Microsoft, Amazon, Alibaba, Facebook did a couple years back. Apple probably still does. Facebook maybe not.
I don’t think it was common though.
If anyone really cares about specifics, sites like Macrotrends are user-friendly enough.
ETA Meta or whatever the Zuck is calling it these days.
Bzzt. They had massive stock buybacks.
Spending money to keep stock prices high is another high finance tactic executed by the guys who get company stock at a reduced price as part of their compensation.
It’s a matter of public record that, coming into COVID, Air New Zealand had around $1B NZD in cash. It wasn’t really a “rainy day” fund specifically but it was intentionally maintained at around that level because it was thought that amount of cash would be enough to smooth out any major issues the company faced. It wasn’t. Part of the problem was that a lot of the cash was from pre-bookings for flights that would not be able to go ahead and those customers were going to want their money back. Also it costs a lot of money to run an airline so the cash was only going to last a few months and they had to make cuts and rely on a line of credit from the NZ government.
Most aircraft are either leased or on time payments - so contractually, still gotta make payments on those multi-multi-million dollar aircraft whether they are earning money or not. Rainy day probably did not anticipate an atmospheric river of COVID lasting over a year. The adroit management of the NZ PM in basically closing the borders to all certainly didn’t help the airline’s situation - or, thanks to their marvelous quarantine procedures, did it stop the eventual flood of COVID cases.
True. On the flip side we all enjoyed a very normal life in NZ for much of 2020 and 21 and once it did come in it was the less serious Omicron variant. Air NZ are currently doing very well with one of their biggest half year profits ever. Lets see if Greg Foran can get us straightened out and on a good course before he sets out to find his next challenge.
Well, I didn’t say it was someone’s ONLY job, just that someone actually pays attention to all that accounting;/finance stuff if they expect their business to be remotely successful.
And yeah few people or companies are going to be able to just engage in business as usual for six months without money coming in. My point was more that above a certain income level you have options that you might not if you’re less well off.
That’s exactly what an endowment is.
For my business, it is this.
We operate on a cash basis with our income being sufficient to cover our expenses and what is left over goes to the business owners as profit. However we have “at call” finance facilities that we can call on if in any given month our expenses exceed our income (this basically never happens).
If we do face a crisis, we can just call on our credit facilities. But we don’t have cash lying around for a crisis because our firm is not in the business of investment. Any spare cash gets distributed to the business owners and we invest it ourselves.
I’ve worked for two property and casualty insurance companies, one very small and one very large. Both keep a tremendous amount of money on the books as Loss Reserves. These reserves include money set aside for claims we know about (open claims), plus an even greater sum for claims we don’t know about: IBNR (incurred but not reported).
A carrier writing strictly first party property coverage can close their reserves faster than one that writes, at least in part, liability - especially Professional (architects, say) or Management Liability (acts of executives).
Most large corporations plan their cash flow very, very closely, as I discovered when I was working as a construction consultant with a large pharma company.
We might have a project budgeted at $100,000 that is scheduled to be completed and billed by a specific date. Along the way, I might come up with a way to save $20,000 in costs by substituting a different material or some newer equipment. Turns out that’s a bad thing. The project manager is expected to bring the project in at $100,000 +/- 10%. If they finish it at a cost of $80,000, that’s unexpected and undesired. The financial people already had plans in place to have $110,000 available for payment per the contractor’s terms. Ending up with an extra $30,000 just sitting around unused at the end of the project is not good practice.