Where companies keep their cash

Marketplace Staff Oct 6, 2011

Where companies keep their cash

Marketplace Staff Oct 6, 2011

Steve Chiotakis: We heard this week that Apple has been knocked off its perch as the company hoarding the most cash.
That honor now goes to China Mobile, which has amassed $50 billion, almost double what Apple has.

So that’s got me wondering what a company does with $50 billion in cash. I asked Marketplace senior editor and resident explainer Paddy Hirsch to come and talk to us about it. Hi Paddy.

Paddy Hirsch: Hello.

Chiotakis: Where do they put all this money? Is it stacked up in some vault or in a Swiss bank somewhere?

Hirsch: Well, first off Steve — and I’m sorry to disappoint you about this, because you seemed really excited about that Swiss bank thing.

Chiotakis: I was actually, yeah.

Hirsch: Most of the cash that companies hold isn’t cash at all.

Chiotakis: OK, so what do you mean? No piles of neatly stacked $100 bills?

Hirsch: Well, maybe no more than a briefcase or two. You see, when reporters refer to a company’s cash, they’re reading from a section in the annual reports that’s headed ‘Cash and cash equivalents.’ Those equivalents are things that are very liquid — that is to say very easily converted into cash, so easily in fact, that they may as well be cash.

Chiotakis: But it’s not cash.

Hirsch: No. It kind of helps to think about it like a human body. A human body needs fuel to operate, just like a company needs cash. But you know, a human like me doesn’t walk around with just a belly full of food all the time. We take that food and we convert it into different things, say like fat under my skin or carbohydrate and protein in my muscles. Same with a company: it takes its money, the cash that it earns, and then it creates reserves in the form of things like money market accounts and Treasury bonds and corporate securities.

Chiotakis: And when it starts operating?

Hirsch: Right, you can draw on those reserves, just like a body does. So in the same way that my reserves convert to energy at different rates, so do a company’s. When I start running, I might have a belly full of pasta, OK? I burn that up really, really quickly — instant energy. That’s like the briefcases full of cash that we talked about. Just like that, they convert.

Next, my body’s going to go for the carbohydrate and the muscles. Another very quick source of energy. In a company that’s kind of like a money market fund. One really quick phone call and it’s cash; bada-bing, you’ve got your money in the bank. After that, my body starts to go for the hard stuff, the fat and also the protein in my muscles. In a company, that’s when it starts selling securities. That step takes a little bit longer.

Chiotakis: Ahh, Treasuries.

Hirsch: Treasuries. In order to sell that stuff, you have to find a buyer. It’s a phone call, it’s pretty quick, but you’ve got to find someone on the other end to convert those things into cash and to get your money out.

Chiotakis: So if you were going to describe say, Apple, the computer company, as a human body, what would it look like?

Hirsch: Well it’d look pretty good, right? Apple’s got $76 billion in cash, cash equivalents, marketable securities. So it’d look pretty healthy. Great muscle tone, nice shiny skin, probably a nice layer of fat to keep their body warm. Maybe even a little bit of a potbelly there. And of course, with pure cash at $2.8 billion, that’s a good solid meal and its gut ready to burn up.

Chiotakis: Paddy Hirsch, senior editor, master of the Marketplace Whiteboard. Paddy, thanks.

Hirsch: You’re welcome.

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