All you need is cash: how liquidity will select Covid’s survivors

Having a liquid balance sheet when the credit cycle turns gives firms a competitive edge that can last far beyond any crisis year

All you need is cash: how liquidity will select Covid’s survivors

For corporate treasurers, it’s a time to husband cash, cut costs and tap debt; any move, in fact, that will bolster resilience in the face of the coronavirus threat.

At the same time, treasury departments must also keep an eye on when it will make sense to spend more to get the lead on their rivals when the recovery begins.

Treasurers caught between these two poles would do well to turn to a Bank of England working paper released earlier this year that took a detailed look at the correlation between corporate cash holdings and investment after the 2008 financial crisis.

According to the research, firms with high pre-crisis cash holdings invested significantly more than their cash-poor rivals during the global financial crisis and especially so during the recovery phase.

The ripple effect from this showed significant returns even years after the crisis had passed.

“This resulted in a persistent and growing investment gap between cash-rich and cash-poor firms,” the Bank of England study found. “Cash especially benefited young and small firms and firms in industries where rivals became more financially constrained.”


The research showed there was a significant “amplification effect” that was absent in the period preceding the crisis.

“The ability to continue to invest allowed cash-rich firms to gain market share and accumulate more profits over the long-run,” it said. “Having a liquid balance sheet when the credit cycle turns thus gives firms a competitive edge that lasts far beyond the crisis year.”

For some of the world’s largest corporations, the fact that they are now sitting on significant cash holdings is no secret.

“I would just want to get through a couple more months of understanding what that recovery looks like,” Robert McMahon, chief financial officer of life-sciences company Agilent Technologies told investors in early June.


“Liquidity is still an asset that we want to have in our back pocket. We have a lot of it, and I think it will serve us well versus some of our competitors when we come out of this,” he was quoted as saying in the Wall Street Journal.

According to financial data from S&P Global Market Intelligence, large companies in the US increased their cash holdings, short-term investment as well as total debt this quarter.

The data showed that for S&P 500 companies, the median increase in cash and short-term investments was 13.9% in the March quarter, compared with less than 4.1% in the prior three quarters.

How they spent or saved those funds is likely to show in second-quarter results next month.

Among the big names said to be hoarding funds are Pepsi (which doubled cash on its balance sheet when it borrowed $7.6bn in the first quarter), Hilton (which raised $1bn by selling loyalty points) and Agilent which repatriated foreign profits.

As the Bank of England study suggest, keeping cash means you have ready ammunition available when sustainable growth resumes and there is the opportunity for new investments.


Cheap money from central banks around the world – in contrast to 2008 when liquidity dried up – has also made it prudent for corporate treasurers to hoard cash to allow for greater flexibility.

But it’s not all about keeping your powder dry.

In many cases, big companies have spent heavily in the face of sharply lower revenues to maintain operations and workforces.

At the same time, other spending has been put on hold, such as travel. As businesses are reopening, these costs will return, putting pressure on corporate budgets.