Operating cash flows boosted many balance sheets in the 12 months ending March, but that will be harder to do this quarter.

The Association for Financial Professionals’ annual Liquidity Survey takes a thorough look into corporate treasury trends and information on corporate cash holdings, cash management, and short-term investing. 

Among other questions on cash management, the survey asks whether balance sheet cash increased or dropped in the previous year, and why. And the responses come from the finance executives who watch this most closely: treasurers, directors of the treasury, treasury analysts, and other treasury department executives.

In the latest edition of the liquidity survey released mid-June, the AFP found that more than one-third of the 284 respondent organizations (37%) increased their cash holdings in the 12 months ending March 2022 and 17% reported balance sheet cash falling. The percentage that added to their cash buffers was not as high as the previous year’s record but was only 10 percentage points off.

For the second and third quarters, finance executives said they would continue to treat cash as a precious commodity. 

Over half of respondents (56%) anticipated their organizations’ current cash and short-term investment holdings would stay the same through the end of the third quarter (September 2022), but one-quarter of treasury executives (27%) expected cash and short-term investment holdings would increase during that time.

What factor has had the most impact on larger cash balances? “Increased operating cash flow” had a significant or moderate impact on the increase in organizations’ cash holdings for 82% of respondents, according to the AFP. 

Other drivers contributing included pandemic planning and contingencies (cited by 60% of survey respondents), increased debt outstanding/accessed debt markets (41%), and government stimulus (40%). (See chart above.)

Those answers resembled the 2021 liquidity surveys, except that for this year “decreased capital expenditures” was much farther down the list (23% cited) than it was in 2021 (77% cited, largely due to the effects of the pandemic). And 42% of this year’s treasury executives said geopolitical risks had “some” impact on larger cash reserves.

The “volatile and uncertain” economic environment has compelled organizations to “reduce spending and focus inwardly on cost,” the AFP said. As a consequence, efficiency projects and operating cash flow increases have largely benefited. The shoring up of balance sheets will most likely continue, “especially since there is no clear timeframe as to when the situation will be more stable,” the AFP said.

It makes sense that most CFOs hadn’t clipped CAPEX in the 12 months ending March 2022. The economy was still looking robust, with consumer sentiment nearly 30 points above where it is now, job openings rising meteorically, and the Fed only recently committed to aggressive monetary tightening.

Things have shifted considerably since. The problem with building cash reserves now is that debt will be more expensive (if a company can access the markets) and a slowing economy could eliminate any inflation-adjusted gains in operating cash flow. Last week’s CFO Survey from Duke University and the Richmond Federal Reserve Bank found that adjusted for inflation, CFOs didn’t forecast average revenues to grow at all in 2022. What will grow are input costs, which the 295 respondents to the survey indicated will jump 10% this year.

The commencement of the second-quarter earnings season will start to help answer some of the questions about where both the U.S.  economy and corporate cash cushions are headed. The only certainty is that trying to add to cash buffers in the third quarter won’t be easy — but then nothing ever is in this kind of economic environment.