CFOpedia

Most profitable companies end up distributing most of their surplus cash (cash not needed to run the business nor to fund future capex and growth endeavors). Indeed, the general accepted principle is that companies should distribute such cash, as it is expected to be better allocated by the investors themselves. Nonetheless, many companies (such as Apple with 169,1 Bln Usd and Alphabet with 113,8 Bln Usd in 2022) end up hoarding a vast amount cash. Why do they do this? Should these companies be distributing more cash? Reasons to hoard: Serves as munition for future acquisition and capex opportunities, which may appear suddenly; Provides financial stability, as the company has reserves to face future downturns an unexpected events wihtout the need for emergency rushed-negotiated loans not government interventions (such as the infamous autosector and banking cases in the US and Europe); Decreases debt expenses (though, the amount saved in debt interests probably does not compensate the f...

In this section, I analyze how some of the most cash-rich companies in the world invest their surplus cash. I start by giving a look at the most famous cash-rich companies, such as Apple, Alphabet (Google) and Amazon, which have dozens of billions in surplus cash. However, I also spent some time analyzing a set of smaller cash-rich companies, in order to understand whether there is a difference in surplus cash investing strategies between the largest companies in the world and less known, smaller companies. In general, these companies seem to have the goal of investing surplus cash in low risk assets, which obviously have potential small returns. Nonetheless, some companies take on more risk than others. Indeed, some companies (especially the smaller ones) invest only in deposits, money market funds and short-term treasury bills, while others, searching for higher yields, end up also investing in bonds with longer maturities and issued by entities other than reputable national treasuri...

On February 2021, Tesla announced that it had invested 1,5 Bln USD in bitcoin (which amounted to less than 8% of the 19,4 Bln USD the company had in "Cash and Cash Equivalents" on 31/dec/2020). The company did not announce the average price at which it bought bitcoin. However, judding by the timing, it can be inferred that it was around 40,000 USD.  The bitcoin price went up for a while (arguably due to Tesla's bitcoin purchases themselves, as they created a significant buzz), having surpassed 60,000 USD on March/April 2021 and again later on October/November 2021. However, it fell sharply after that, having reached levels below 20,000 USD in June 2022. According to the company's fillings, by 30/Jun/2023, the company had reduced its exposure in digital assets (I assume that the large majority of it was bitcoin) to only 218 Mln USD, and made further reductions after that. I cannot find exact information on how much Telsa lost with this investment. However, according to...

From a strategic corporate finance point of view, ideally/theoretically, companies should retain only the cash they need to run their businesses and fund future capex and growth endeavors. Nonetheless, often companies see themselves with surplus cash in their balance sheet.  Although any company can decide otherwise, the norm is for the companies to invest such surplus cash in financial instruments that have low-risk, have short-terms and are highly liquid (convertible in cash within a few hours or days), such as short-term deposits, treasury bills, and money market funds. These instruments are usually considered "cash equivalents", and will fall in the same section as cash in the balance sheet, namely in "cash and cash equivalents". A template for a Cash Investment Policy 1 - Objective: The objective of this cash investment policy is to prudently manage the company's short-term cash reserves by preserving capital, maintaining liquidity, and generating a reasona...

Cash forecasting is the process of estimating a company's future cash inflows and outflows. By accurately predicting cash inflows and outflows, a company can identify how much cash it will need to have at each time period so that it can meet its short-term obligations, allowing the company to determine if it will have surplus cash to invest or if it will need to raise funds. Which methods exist? A wide range of methods exist, and the choice of which one to use depends on the characteristics of the business and on the time horizon of the forecast. I will identify here the three types of methods that make most sense to me: A) Historical cash forecasting Analyzing past cash inflows and outflows provides a valuable tool for the identification of seasonal trends, event-related patterns and cash maximium drawdown. It is relatively easy to compute. As long as the company has the cash inflows and outlfows recorded in a database, one just needs to apply simple statistical analyses.  Ac...