You Can't Pay Your Bills With This Cash

As if credit analysts didn't have enough difficulty deciphering and analyzing customer financial statements, now we're finding out that "Cash" on a balance sheet doesn't necessarily mean real "Cash".

Turns out that the trouble in the credit markets has hit what was represented in corporate financial statements as "cash equivalents". Apparently, many of these entries are auction-rate securities, which are long-term bonds with interest rates reset monthly through an auction process. Now with the market demand drying up for these securities, corporations are taking big losses against their "cash" accounts. Lawsuits have begun against the investment houses, but the sudden drop in liquid assets has become a concern for creditors relying on these assets for debtors to pay for the goods and services they purchase on terms.

Auditors have caught on to the practice and are recommending companies remove such securities from their cash balance accounts and move them to the more-appropriate "investment" accounts line on the balance sheets.

What are we unsecured creditors to make of this recent development in the credit market meltdown?

1) Most of us have started asking for clarification on the cash balances to ensure the cash line on the balance sheet represents low or no-risk assets that won't suddenly disappear.
2) We're verifying actual demand deposit accounts in the bank accounts.
3) Those "cash equivalent" balances that are actually investment assets are moved to the investment lines in our analysis.
4) Many of us are taking out a percentage of the investment assets from working capital calculations to be conservative in predicting cash flow strength.

Now that "Cash" doesn't necessarily mean "Cash", maybe companies will pay attention to ALL the risk in their assets--even those over-valued, underworked receivables!

Pam Krank
President
The Credit Department, Inc