What Does “Trapped Cash” Really Mean?

“Trapped Cash” is a common term these days. Every day there is a new article chronicling the growing piles of cash US-domiciled companies are building. But to a shareholder is there a difference between offshore and domestic cash? The inevitable answer is “yes” because unlike other assets offshore cash tends to lie dormant, and idle assets stifle innovation, jeopardize future results, and encourage shareholder angst.

The recent increase in dividends, buybacks, and capital expenditures underlines how companies are reacting to shareholder pressure. The need to react is a growing problem and organizations that wait to address growing overseas accounts, particularly the global 2000, risk significant impact to their market capitalization. Investors routinely measure banks by their Return on Assets (ROA), and it is evident they are taking the same approach to valuing corporations. Extracting as much value from every asset should be a focus for all companies, and contrary to current practice, this should apply to foreign assets as well.

Large US multinationals have accumulated nearly $2 trillion in cash held overseas, up 11.8% since last year. As the economy has become more global and increasingly intertwined, companies have been challenged to create strategies that optimize 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-optimized” structures that create large concentrations of cash in countries like Singapore, Ireland, and Switzerland. Interestingly, investors only scrutinize the location of foreign assets. Increased foreign earnings are viewed as a positive, but increased foreign cash is not. In fact, foreign cash is typically discounted by investors and is always discounted by financial institutions when assessing a firm’s value. This is why banks and consulting firms have rushed to create strategies to leverage this capital including complicated Special Purpose Vehicles (SPV) arrangements that claim to be the silver bullet to trapped cash. While appearing elegant, these schemes are typically inefficient to implement and pose significant accounting risks. Does it have to be this complicated?

Before we answer that question, we should first establish what causes cash to become “trapped.” How a company invests in foreign operations, various tax regulations, exposure to currency fluctuations, and the costs incurred by repatriation are all factors that determine whether cash is “trapped.” In each of these situations a company measures the costs and/or risks of putting that cash to work versus the benefits. Designating cash as “trapped” is a business decision – one made to maximize shareholder value, so putting “trapped” cash to work should also be a business decision.

As we have discussed, there are several expensive, time-consuming ways to deploy foreign capital that yield a low Return on Assets (ROA). A simple, growing solution centers on allowing suppliers to receive early payment in exchange for a cash discount. Because corporate financial operations are centralizing, this approach makes a lot of sense as these foreign entities are well capitalized and generate huge cash flow from operations. In fact, most companies have zero or negative cash conversion cycles in these locales. Not only do suppliers win, but utilizing cash to drive foreign earnings is also accretive to shareholders because investors regard both the use of foreign cash and improved margins as positives. Increased EBITDA is the number one focus of both shareholders and investors.

C2FO is the most efficient approach to deploying trapped cash. Corporations are now using the early payment marketplace to accelerate cash and boost foreign earnings in operations centers around the world. Average per annum earnings are in excess of 5%, increasing to more than 10% in certain countries. 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. Additionally, because C2FO does not influence or facilitate the transfer of funds between parties, regulation concerns are eliminated. Buyers and suppliers across the globe collaborate every day to negotiate the best price for accelerated payment, and because suppliers name their own rate for early payment consideration, C2FO is a valuable tool for Corporate Social Responsibility and vendor financial health as well.

Treasurers and CFOs can expect the topic of trapped cash to stick around for years to come. Until there are global reforms in this arena, companies will continue to optimize legal structures for their shareholders, and it is imperative that companies form a strategy to benefit shareholders as well. It is certain that companies will continue international expansion at a rapid pace and they should consider how sometimes the most complicated problems require a simple solution. Using capital to accelerate payment is the simple solution and early payment marketplaces are the most efficient vehicles. Foreign earnings, shareholder sentiment, and supplier health all benefit. Putting idle assets to work will scale market capitalization and C2FO’s “true” dynamic discounting marketplace is at the forefront of this new world solution.