Hoarding Liquidity
Business Finance (02/03) Vol. 9, No. 2, P. 28 (Gamble, Richard H.)
Corporations are starting to hoard liquidity now that banks have significantly raised their lending standards in the wake of financial disasters such as Enron. Peter Sereda, vice president and treasurer of Telephone & Data Systems Inc., says the old strategy was to keep as little cash as possible on the balance sheet, using it to pay down debt, but the tighter credit market has changed that. Ratings agencies are also now saying a company's liquidity position counts more than it did before.
According to Stephen M. Payne, CEO of working capital management advisors REL Consultancy Group, companies can buy liquidity in the marketplace but should concentrate more on internal financial operations, such as reducing inventory and expediting collections. The need to borrow can be reduced by cutting the rate of days sales outstanding, says Jerry Curtis, CEO of NRS
Outsourcing, while Veena Gundavelli, president and CEO of cash flow management software provider Emagia Corp., says borrowing needs can be reduced by improving forecasts for incoming cash. Global companies can improve their liquidity by using notional pooling, which takes unproductive balances in bank accounts and pools them to offset debit and credit positions and ensure that all funds are invested. Another liquidity solution for global companies is to outsource offshore cash management to banks using sweep accounts to invest surplus cash automatically.
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