Working Capital

Putting trapped cash to work for your business

July 6, 2015
The C2FO Team

The phenomenon of “trapped cash” is increasingly common, as US-based multinationals build large stockpiles of cash held overseas – usually for regulatory or tax reasons.

American companies tend to let these assets sit idle due to a variety of factors, including tax regulations, currency fluctuation risks, and the costs of putting the cash to use in the US rather than leaving it offshore. By allowing these assets to lie dormant companies stifle innovation, jeopardise future results and create stockholder unrest.

Trapped cash is nothing new. Large US multinationals have accumulated nearly US$2 trillion, up 11.8% since last year. As the economy has become more global and intertwined, companies have been challenged to create policies and approaches that optimise their global operations. Executing the right strategies can be difficult depending on the jurisdictional regulations and tax treatments, but most companies have now moved to ‘tax-optimised’ structures that create large concentrations of cash in countries like Singapore, Ireland and Switzerland.

What is interesting is that investors only scrutinise the location of foreign assets. Investors routinely measure banks by their return on assets (ROA), and it is evident they are taking the same approach to valuing corporations. Investors and shareholders have a strong interest in increased foreign earnings, but they typically do not view increased foreign cash as contributing to a company’s value. In fact, foreign cash is typically discounted by investors and is always discounted by financial institutions when assessing a firm’s value.

Banks and consulting firms have rushed to create strategies to leverage this capital including complicated special purpose vehicle (SPV) arrangements that claim to be the silver bullet to trapped cash. These solutions are indeed elegant, but are typically inefficient to implement and pose significant accounting risks. Thus we have to ask, does a seemingly complicated problem like trapped cash require a complicated solution?

Optimising the value of every asset should be a focus for all companies and – contrary to current practice – this should apply to foreign assets as well. Businesses, particularly those in the Global 2000, need to address their burgeoning overseas accounts or risk significant impact to their market capitalisation.

A simple solution for trapped cash

There are numerous expensive and time-consuming ways to deploy foreign capital to yield very low ROA. A simple, growing solution centres on allowing suppliers to receive early payment in exchange for a cash discount.

Because corporate operations are becoming more centralised, this approach makes a lot of sense as these foreign entities are well capitalised and generate huge cash flow from operations. In fact, most companies have zero or negative cash conversion cycles in these locales. Utilising cash to drive foreign earnings is not only a boon to suppliers, but it is accretive to shareholders because investors regard both the use of foreign cash and improved margins as positive.

C2FO employs a highly efficient approach to deploying trapped cash. Corporations use their early payment marketplace to accelerate cash and boost foreign earnings in operations centres around the world. Average annual earnings exceed 5%, increasing to more than 10% in certain countries.

Strategic dynamic discounting for supplier early payments benefits the entire global operation through improved margins and increased earnings before interest, tax, depreciation and amortisation (EBITDA) and strengthens the supply chain as suppliers gain working capital at rates they find desirable.

Because the working capital market is jurisdiction and currency agnostic, it can be deployed easily across a corporation’s entire structure and specifically in the jurisdictions with the most capital. There are no regulation concerns because C2FO does not influence or facilitate the transfer of funds between parties.

Thousands of buyers and suppliers across the globe collaborate every day to negotiate the right price for accelerated payment, and because suppliers offer their own rate, C2FO provides a valuable tool for corporate social responsibility (CSR) and supplier financial health, as a multilingual, multi-currency, driving multiples on earnings each day for dozens of multinational organizations.

The topic of trapped cash is likely to stick around for many years to come. Until there are global reforms in this arena, companies will continue to optimise legal structures for their shareholders, and it is imperative that companies form a strategy to benefit those same investors.

It’s a certainty that companies will continue international expansion at a rapid pace, and they need to consider that the most complicated problems often require the simplest solutions. Using capital for accelerated payment is that simple solution. Foreign earnings, shareholder sentiment, and supplier health all benefit. Putting idle assets to work will scale market capitalisation, and early payment marketplaces are at the forefront of this new world solution.

Working Capital. Working for Everyone.

C2FO provides working capital solutions for you, your suppliers and your customers.

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