2012 Outlook: Cash Is Abundant, but Optimism in Short Supply

2012 Outlook: Cash Is Abundant, but Optimism in Short Supply

There's plenty of money in the financial supply chain, but companies are still reluctant to spend it.

A flurry of end-of-year surveys and prognostications regarding the economy pretty much all come to the same conclusion: 2012 isn't going to be a whole lot different than 2011. The fall elections, unemployment, uncertainty about the stability of the eurozone, consumer confidence (or lack thereof), health care costs and other factors that caused 2011 to be a year of frequent hiccups will still be top-of-mind issues for senior executives in 2012.

In a survey of 600 CFOs conducted by Bank of America Merrill Lynch, for instance, respondents give the current economy a score of 44 (out of 100), the lowest score in the survey's 14-year history, and down from last year's score of 47. What's more, just 38% expect the economy to expand in 2012, a big drop from the 56% from the previous year's survey.

One somewhat bright note, though, is that manufacturers have a brighter outlook on the year ahead than service companies. Fifty-one percent of CFOs at manufacturing companies expect to add staff in 2012, compared with 43% in the service sector. Also, service companies are much more concerned about the U.S. budget deficit than manufacturers: 70% vs. 54%.

Top 5 Areas of
Concern about the
Economy
1. Government leaders
2. U.S. budget deficit
3. Health care costs
4. Unemployment
5. Consumer confidence

Source: Bank of American
Merrill Lynch 2012 CFO
Outlook

The No. 1 financial concern for CFOs at all companies, according to the survey, is the cost of health care (56%), with energy costs and consumer confidence tied for second (43% each). "Without question, many CFOs are hoping for more positive signs of consistent economic stability and growth, in the U.S. and abroad," says Laura Whitley, head of global commercial banking at Bank of America Merrill Lynch. "They're staying the course while waiting for the economy to improve."

In a survey of 300 Fortune 1000 executives, consulting firm Capgemini found that these companies are being hurt by late payments from their customers, with almost half (45%) saying they've seen an increase in late payments over the past year. As you would expect, the payment delays have significantly impacted business for these companies.

According to Capgemini, the top three areas impacted by delayed cash flow are growth (29% of respondents), hiring (27%) and revenue (20%).

Hoarding Cash Is King

In research conducted on large public companies (primarily manufacturing and retail) by REL Consulting, another trend emerges: the hoarding of cash at record levels. REL's study indicates that companies are holding 11% more cash than they did in the previous year, and their total debt is also up by 7%.

Meanwhile, large companies are taking 2% longer to collect from customers, and they're carrying 2.5% more in inventory. All told, REL estimates these companies have $800 billion unnecessarily tied up in receivables, payables and inventory, largely due to suboptimized working capital management.

"Companies are taking their eyes off the ball when it comes to efficiently running their business," says Dan Ginsberg, associate principal with REL Consulting. "Accounts receivables are bloated, and companies are holding more inventory for various reasons, only some of which are strategic."

"Middle-market companies, much like their larger brethren, have hoarded cash since late 2008, with the expectation that worse days were ahead," adds Walter Owens, head of specialty and corporate banking at TD Bank, which conducted a survey of 200 CFOs from midmarket companies. Reflecting a more positive outlook on the year ahead, Owens says, "With interest rates at record lows and the Fed promising to stay the course through 2012 into 2013, the negative headwinds are abating and companies are making strategic capital investments so that they emerge stronger."

From the TD Bank survey, slightly more than half (51%) of the respondents expect to increase their capital expenditures in 2012, a healthy bump up from 39% last year. Three-quarters (75%) expect sales to increase this year, and 27% expect an increase of at least 10%. 9

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