Why are US companies hoarding so much cash? (2024)

Why are US companies hoarding so much cash?

Researchers have offered multiple explanations, including flexibility and taxes, which we review below. But our work adds another explanation that we call “precautionary cash holdings.” In short, companies hold cash because it helps them avoid premature failures that decimate shareholder value.

The precautionary motive. Firms hold cash to better cope with adverse shocks when access to capital markets is costly.

Individuals living paycheck to paycheck are facing increased pressure to balance their budgets amidst rising interest rates and inflation. Consequently, company owners and CFOs are psychologically sensing the crisis and opting to reserve more corporate cash to mitigate market risks.

Cash reserves refer to the money a company or individual keeps on hand to meet short-term and emergency funding needs. Short-term investments that enable customers to quickly gain access to their money, often in exchange for a lower rate of return, can also be called cash reserves.

If cash is more or less a permanent feature of the company's balance sheet, investors need to ask why the money is not being put to use. Cash could be there because management has run out of investment opportunities or is too short-sighted and doesn't know what to do with the money.

Money hoarding is an act of obtaining resources and keeping them in an attempt to sell to the customers at a preferred higher price in the future. It is regarded as unethical practice since it creates a false scarcity in the market. Hoarding money is carried out in a situation such as when there is war in a country.

Too much cash negatively impacts the company's performance in both subtle and obvious ways. Investors want to know why management has not put the cash to work when it becomes a permanent feature on the company's balance sheet.

Hoarding cash means missing out on considerable opportunities. Two of these include potential returns and compounding interest. “When you hoard cash, you miss out on the potential returns you could have made from investing that money,” Hathai said.

Lower returns: Since cash is largely a risk-free asset, investors don't get the “risk premium” that other investments, like mutual funds or GICs, may come with. Inflation risk: While cash has no capital risk, inflation can erode its purchasing power – meaning you wouldn't be able to buy as much with it in the future.

Research by the professors at Kellogg School of Management found that reserves of Apple, Inc. (NASDAQ:AAPL), Alphabet, Inc. (NASDAQ:GOOG), and Microsoft Corporation (NASDAQ:MSFT) accounted for 92% of cash reserves that they could document.

How much cash should I have on hand?

In addition to keeping funds in a bank account, you should also keep between $100 and $300 cash in your wallet and about $1,000 in a safe at home for unexpected expenses. Everything starts with your budget. If you don't budget correctly, you don't know how much you need to keep in your bank account.

As a general rule of thumb, it's recommended that businesses have at least three to six months' worth of cash on hand to cover operating expenses if possible, though you should make sure your business can afford whatever amount you set aside.

Companies most often keep their cash in commercial bank accounts or in low-risk money market funds. These items will show up on a firm's balance sheet as 'cash and cash equivalents'. The company may also keep a small amount of cash––called petty cash–– in its office for smaller office-related expenses or per diems.

In order to cover those day-to-day expenses Apple keeps around $40B in cash (held in checking accounts; this covers around two month of expenses), $40B is invested in short term securities (less than one year maturity) and $140B in longer term assets (between 1 year to 5 years).

In the cash flow statement, if cash from operations are positive consistently over a period of time, it is a good signal. At the same time, if the company's outflow in investment activities are not going up consistently, one needs to identify the reasons for the same.

Psychiatrists believe that hoarding occurs when a person becomes isolated from society or family and becomes aggressive in their behavior. Greed is often the root cause of hoarding, and it can lead to psychological disorders. Hoarding can be caused by anxiety, restlessness, severe depression, and traumatic life events.

Extremely rich Americans hoard their wealth through tax loopholes and preferential policies enforced by their armies of lawyers, accountants, wealth advisers, and politicians.

They Want the Supreme Court to Keep It That Way. America's wealthiest families held an astounding $8.5 trillion in untaxed profits in 2022.

“We would recommend between $100 to $300 of cash in your wallet, but also having a reserve of $1,000 or so in a safe at home,” Anderson says. Depending on your spending habits, a couple hundred dollars may be more than enough for your daily expenses or not enough.

Cash on Hand as of December 2022 : $567.23 B

According to JPMorgan Chase's latest financial reports the company has $567.23 B in cash and cash equivalents.

How do you handle large amounts of cash?

You should use a locked bag, a briefcase, or a backpack to store your cash and avoid displaying it in public. You should also avoid carrying large amounts of cash alone or at night and choose a safe and well-lit location for the transaction.

“More than two months' worth of living expenses in a savings account is too much given the ability to earn around 5% from easily accessible money market accounts that should not fluctuate in price.”

Banks have little incentive to maintain excess reserves because cash earns no return and may even lose value over time due to inflation. Thus, banks normally minimize their excess reserves, lending the money to clients rather than holding it in their vaults.

Warren Buffett Is Sitting on a Record $167.6 Billion Cash Pile.

Warren Buffett's Berkshire Hathaway has reached a cash reserve of $167.6 billion, surpassing Uber and Nike. Buffett's return of 4,400,000% outpaces S&P 500's 31,000% since 1965.