Resources | Finance and Lending | November 26, 2019

What Does “Trapped Cash” Really Mean?

“Trapped Cash” overseas is a growing challenge for corporations and their shareholders. Fortunately, there’s a simple solution in the form of C2FO’s early payment program.

“Trapped Cash” overseas is a growing challenge for corporations and their shareholders. Fortunately, there’s a simple solution in the form of C2FO’s early payment program.

Every day, it seems, a new article chronicles the growing piles of cash that U.S.-domiciled companies have been building in other countries over the past decade.

Why is accumulating cash overseas a problem? Unlike other company assets, offshore cash tends to lie dormant. These idle assets stifle innovation and investment, jeopardize future financial performance and encourage shareholder angst.

The result is underutilized “trapped cash,” which some analysts have estimated to be in the trillions of dollars.

The increase in dividends, buybacks, and capital expenditures in recent years underlines how companies have responded to shareholder pressure on this issue. Trapped cash is a growing problem because organizations that wait to address their growing overseas accounts, particularly those among 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.

Fortunately, there’s an effective way to free up and optimize trapped cash through an early payment program like C2FO. First, however, it helps to understand why companies began moving their cash offshore, and what efforts have been made to bring it back.

Tax cuts only go so far

The issue of idle cash trapped offshore remains a real concern, despite efforts by former President Donald Trump and Congress to bring more of it home.

According to some sources, large U.S. multinationals still hold as much as $2.5 trillion in cash overseas, even after tax cuts on corporate profits earned offshore went into effect in 2018. Corporations reportedly brought back $664.9 billion in 2018 in response to the tax cuts—far short of Trump’s prediction of $4 trillion.

Globalism is the main obstacle to the U.S. tax cut to 15% on corporate profits. As the economy has become more global and increasingly intertwined, companies have created strategies that optimize their worldwide operations. Executing the right strategies can be difficult depending on jurisdictional regulations and tax treatments, but many companies have now moved to tax-optimized structures that create large concentrations of cash in countries like Singapore, Ireland and Switzerland.

Interestingly, investors have 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 company’s value.

That’s why banks and consulting firms offer 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 often difficult to implement and pose significant accounting risks.

Does freeing up trapped cash really have to be that 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 all help 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 of simply holding onto it.

Designating cash as trapped is a business decision—one made to maximize shareholder value, so putting trapped cash to work must also be a business decision.

The early payment solution

There are many expensive, time-consuming ways to deploy foreign capital that yield a meager ROA.

A simple, faster solution allows a company’s suppliers to receive early payment in exchange for a cash discount. Because corporate financial operations are centralized, this approach makes sense as foreign entities are often well-capitalized and generate huge cash flow from operations. In fact, most companies have zero or negative cash conversion cycles in these locales.

An early payment program not only allows suppliers to accelerate their payment cycles, it utilizes cash to drive foreign earnings. Early payment 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.

The C2FO advantage

Among early payment providers, C2FO is the most efficient approach to deploying trapped cash. Key benefits for corporations include:

  • Generating a stronger, risk-free return on cash that improves core EBS and EBITDA
  • Easy to implement, generating savings for the next fiscal quarter
  • It turns idle cash into working capital for supply chains
  • No capital expenditures are required

Many leading corporations use C2FO’s early payment marketplace to accelerate cash and boost foreign earnings in operations centers around the world. Average per annum earnings for these organizations 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, particularly in jurisdictions with the most capital.

Additionally, because C2FO does not influence or facilitate the transfer of funds between parties, regulation concerns are eliminated. Enterprises and suppliers across the globe collaborate every day to negotiate the best price for accelerated payment. Because suppliers can name their own rates for early payment consideration, C2FO is a valuable tool for Corporate Social Responsibility and vendor financial health as well.

The bottom line

Treasurers and CFOs can expect the topic of trapped cash to stick around for years to come.

Until global reforms are enacted, companies will continue to optimize legal structures that benefit their earnings and shareholders. It’s also certain that companies will continue international expansion at a rapid pace.

Sometimes, however, a complex problem like freeing up trapped cash can require a fairly simple solution. Using capital to accelerate payment is that solution and an early payment marketplace is the most efficient vehicle. 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.

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