21 Jul 2010 Dynamic Discounting – What To Do With All That Spare Cash

The Wall Street Journal yesterday high lighted a very interesting trend that is emerging as the global economy considers how sustained the modest recovery is likely to be.  Like victims of some great natural disaster, peering through the rubble of what was once a thriving economy, some chief execs are, as the WSJ puts it, “ready to start spending the mountains of cash they have stockpiled over the past year, despite lingering worries ..”

Apparently, many companies, have hoarded cash as a cushion against continued economic turmoil. At the end of March, nonfinancial companies in the U.S. were sitting on $1.84 trillion in cash and other liquid assets, up 26% from a year earlier, the Federal Reserve reported. The question is, keep the cash stashed to hedge against further turmoil or, if not, what to spend it all on?

There are some obvious homes for all of this cash. Companies that may have been reluctant to court potential buyers for dear of not getting a good price may feel that now isa good time to reconsider and in some industries their could be some consolidation as cash rich companies could take advantage of their strong position.

Use dynamic discounting to apply excess cash to DPO to get a 30% plus return on capital

But for the cautious CFO,  there’s another alternative especially if they want to deal independently of their bank. And they might find an eager listening ear from their suppliers. Having lots of cash is great when times are uncertain but in 2010, when interest rates are virtually zero and the banks reluctant or unable to make working capital available, dynamic discounting offers a much more attractive proposition with a significantly greater return. In return for early payment, many suppliers will happily offer a discount and, depending on the details of the deal, it can deliver in excess of 30% return on capital.