Overall, companies make very little use of the various investment options available to manage their spare funds. This is the conclusion arrived at by the latest study from Credit Suisse, “Financial Investments – a Challenge for SMEs.”
Furthermore, the economists have ascertained that the average level of cash liquidity in Swiss companies has risen significantly since 2000, both as a proportion of sales and relative to company balance sheets. By contrast, the proportion of securities held has fallen. Cash liquidity in the form of immediately available funds preserves a company’s solvency and can act as a driver of growth. However, it yields little or no income.
The economists of Credit Suisse therefore recommend that the management of surplus funds is harmonised with forward planning where the objectives and needs of the company are concerned.
Choosing the appropriate form of investment for corporate funds that are not required either to meet payment obligations or to finance business operations is a basic function of financial management. It is a task that requires due consideration of liquidity, security, and profitability objectives. The principles of efficient management of surplus funds remain the same for both large companies and SMEs, albeit on different scales. But what is happening in practice? What are the investment categories favored by companies, and how intensively do they make use of individual investment instruments?
These and other questions on corporate financial management have been investigated by the economists of Credit Suisse in their new study “Financial Investments – a Challenge for SMEs.” The underlying data for this study includes publicly available statistics on corporate balance sheets in Switzerland and Germany, as well as the results of a market survey conducted with Swiss companies on their use of investment products.
In their study, the economists arrive at the conclusion that financial investment instruments are poorly represented in overall terms. This is apparent from the individual findings of the study as broken down by investment category and volume, as well as by company size, legal entity type, and industry sector. What emerges is how companies often fail to appreciate that the forward-looking investment of free funds can make a contribution to the development of corporate value.
“Our experience shows that companies using financial investments to make a sustainable contribution to corporate value are particularly well-positioned, especially in an era of increasing competition,” says Hans Baumgartner, head of Corporate Clients Switzerland – SMEs, Credit Suisse.
A good 55% of companies in Switzerland use the current account and call money products to manage their cash liquidity and other funds they expect to be freed up. By contrast, significantly less use is made of financial investment products. Around 13% of the companies surveyed also invest in time deposits. Bonds are used by 8% of companies, equities by 14%, investment funds by 11%, and structured products by 5%.
In total, current accounts and call money make up a 69% share of products used for investing surplus funds. This means that the five investment categories of time deposits, bonds, equities, investment funds, and structured products collectively account for just 31% – or less than half that represented by current accounts and call money.
Between 1997 and 1999, cash liquidity and securities were roughly in step as the major two categories for Swiss companies investing surplus funds. Since then, they have headed in very different directions.
The economists of Credit Suisse have analysed the years 2000 and 2005 in detail. At both times, markets were enjoying a surge that was later interrupted. Of the 44 Swiss industry sectors analysed, the average percentage of securities held as a proportion of corporate balance sheets fell from 6.2% in 2000 to 4.8% in 2005. Indeed, many companies had a significantly lower proportion of securities in their balance sheets: In around half of the sectors analysed, the average proportion of securities held was 2.9% or lower.
By contrast, the same period saw an increase in the proportion of cash liquidity from the same starting point of 6.2% to 8.3%, with the median figure of 7.8% being close to the average for all sectors. The levels of liquid funds and securities developed similarly as a proportion of sales.
Both in Switzerland and in Germany, the three most common types of legal entity are the sole proprietorship, the stock corporation (AG), and the limited liability company (GmbH). In Germany, the average proportion of securities held was highest in stock corporations and by far the lowest in sole proprietorships. The average proportion of securities held in limited liability companies was 3.0%.
In all three types of company, the cash liquidity proportion outstripped that of securities. Data of this nature is not available for Switzerland. Given the similarly-structured corporate landscapes in both countries, however, the proportions in Switzerland can be expected to be similar.
As a rule, the higher a company’s sales, the greater the proportion of securities in the balance sheet, as is indicated by the corresponding statistics from Germany. However, the results of the market survey conducted here in Switzerland make the correlation between corporate size and the use made of securities and other investment alternatives rather less obvious.
If a company keeps more cash liquidity than is operationally required, there is no commensurate additional benefit such as additional security and flexibility to offset the opportunity costs of lost interest. Managing surplus funds should contribute added value to a company wherever possible, and particularly in a competitive environment. This is true for both large companies and SMEs, albeit on different scales.
“A company cannot and should not permanently forgo the additional income that financial investments can potentially bring – even though it is obviously critical to take security and liquidity into proper consideration,” says Baumgartner.