Size of Cash Cushions

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The size of the cash cushions vary between companies dependent on the conditions under which they do business. Here are some factors:

1. Cash generation capabilities. This factor hits both ways. A company generating much cash automatically develops a large cushion. On the other hand a company with very slim margins may require to borrow money to create a cushion for contingency.
2. Highly leveraged balance sheets requiring using cash to repay debt, meaning that the cushions rarely gets significant size. Large amount of debt usually also creates a high burden of interest rate payments.
   
   
3. Cash forecasting accuracy. The more accurately the less need for a safety margin in cash holdings.
   
   
4. Risk for game changers forcing sudden need for major product and market investments. This is typically the case for the technological and telecom markets for instance.
   
   
5. Trust in commitment for the corporate’s banking relations. In situations of preparations for market distress corporates tend to store cash and maybe even perform opportunistic borrowings to achieve cash reserves..
   
   
6. Merger and acquisition strategy requires headroom.
   
   
7. Amount of trapped cash in especially growing markets such as Brazil, Russia, India and China. The trapped cash can only be used locally and can be substantial amounts. It is important to adjust for the trapped cash when performing corporate analysis.

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The present economic uncertainties increase the need for cash cushions and this is a systemic shift of the corporate treasury's strategies. I believe this strategy will remain for a considerable time. We saw the same shift from high leverage to low leverage and building up of cash cushions after the Great Depression. It was only abandoned at the rise of the corporate raiders in the 1970-ties when the corporates increased the debt leverage to defend themselves from takeovers. It has not been possible to find an actual best practice ratio of cash holdings in relation to assets or similar key figures.