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Small Businesses Holding On To High Cash Balances, Using Conservative Investment Strategies

Written by Ken Gaebler
Published: 7/1/2009

Many small businesses are reacting to the credit crunch and volatile market by stockpiling cash and using more conservative investment strategies, a trend which may delay the nation's economic recovery.

As a result of the lingering recession and volatile market, businesses are holding tight to their cash balances, said a new report by the Association for Financial Professionals. This conservatism could end up being bad news for small businesses, whose lack of spending may impede or delay economic recovery, experts say.

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The 2009 AFP Liquidity Survey, released this week, announced that 42 percent of small businesses increased their cash balances and short-term investments in the past six months, as opposed to 30 percent that had no change and 28 percent that decreased their short-term investment balances.

This strategy is part of a larger trend of small businesses becoming increasingly conservative with their investment strategies - small businesses reported reducing the number of investment vehicles they use, down to an average of 1.6 from last year's 2.4.

Additionally, 78 percent of short-term investments were distributed among three safe vehicles: bank deposits, money market mutual funds and Treasury securities.

"Despite unprecedented government action, the lack of any significant thaw in short-term credit access is extremely troubling and many companies are reacting by stockpiling cash," said Jim Kaitz, president and CEO of AFP.

"While, many organizations with their strong cash positions will be well-positioned once the economy begins to improve, overall economic conditions will not improve until organizations can begin using their cash in activities that foster growth," he said.

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