What do companies do with their cash?

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Q. For years we have read about large U.S. corporations having trillions of dollars overseas. Where do they keep these funds to assure safety of capital and liquidity for use?
— Wondering

A. Companies do keep money overseas to shield it from U.S. taxes, and the new tax plan encourages companies to bring the money back to our shores.

The tax rules say companies must pay tax on their past international profits whether the companies bring the money back to the U.S. or not.

The tax used to be 35 percent, but now companies will pay a tax of between 8 and 15.5 percent on overseas earnings made since 1987. After this one-time payment, they can bring the money back to the U.S.

So where do companies keep their cash and how do they invest it?

Cash, cash equivalents and short-term investments, which mature within one year and are therefore listed as current assets, would fall into the “cash” category you are reading about, said Brian Power, a certified financial planner with Gateway Advisory, LLC in Westfield.

“For monies that need the highest liquidity for running the business daily, corporations will hold cash at banks for payroll purposes and also invest their cash in cash management funds,” Power said. “These funds typically hold secure short-term investments in an attempt to provide a stable value for the money invested while also offering better yields than a company could get in a corporate checking account.”

Money market funds, ultra-short bond funds and tax-free short-term or money market funds are all examples of this type of investment, he said.

Short-term government securities are another option for corporate cash reserves.

Power said Treasury notes with maturities of 2, 3, 5, 7 and 10 years, and bills with maturities ranging from a few days to 52 weeks are extremely safe, as they’re a promise from the U.S. government, and the Constitution requires that they be paid back.

Short-term Treasuries have the added advantage of very limited interest rate risk because they aren’t around long enough for shifts in interest rates to affect them much, he said.

Commercial paper is another cash investment option.

“Instead of being issued by a government treasury, commercial paper is a short-term debt instrument issued by a large company,” Power said. “When commercial paper comes from a large, stable, investment-grade company, it’s also generally a safe place to park money and can offer better yields than Treasury securities.”

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This post was first published in February 2018.

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