It’s a good time to pivot to more active cash management

Scott Schlange//March 3, 2020

It’s a good time to pivot to more active cash management

Scott Schlange//March 3, 2020

Scott Schlange

Now more than ever, the combination of the current interest rate environment along with some economic uncertainty calls for a more active approach to managing cash. In fact, while many companies have taken a passive approach while focused on growing their business over the past decade, the failure to proactively manage investments during this economic cycle could potentially leave companies without sorely needed liquidity when they need it most.

What’s shaping this sharpened need for a proactive approach?

Though economic data shows that 2020 started off on a strong note with payrolls increasing by 225,000 jobs, there is still some uncertainty involving the spread of the coronavirus, which could potentially impact GDP via a reduction in U.S. travel exports. There is also still concern with the recent phase one trade agreement with China and how the conflict will play out after the presidential election. In addition, while we saw slight improvement in January, it is possible that the manufacturing sector may endure some rough months in the near term. It is important to note that the non-manufacturing sector, which makes up the bulk of the economy, should offset any potential impact.

While most economists agree that a recession is unlikely, elements of uncertainty remain in the U.S. and worldwide economies. It’s a prudent move for financial officers to take an active role to ensure their current cash strategy meets their business goals.

Reevaluating your liquidity strategy

Achieving a healthy balance of operational, reserve and strategic cash means managing investments across a continuum of availability, duration and yield. When the market shifts, in particular when rates increase or decrease, financial practitioners should take a look at whether that mix of investments needs to be changed.

Liquid versus termed funds

As the rate environment evolves, revisit your organization’s need to keep a portion of funds fully liquid. A good approach may be utilizing CD or treasuries to ladder these investments over different terms, so that each tranche is receiving a fixed rate for a certain amount of time and maturing at varied endpoints, and all the cash isn’t locked up for the same duration.

Covering fees versus earning interest

Another balance to consider is that between receiving interest and using earnings credits to offset treasury management fees. If your cash is receiving earnings credit to offset fees, the earnings credit rate is likely to decrease, resulting in more balances needed to cover the same level of fees. It may be time to recalibrate from a goal of earning hard interest to covering the fees and controlling expenses.

Reexamine all options for excess cash

Asset markets are expected to be more volatile, so organizations need to determine how much rate volatility they can withstand. Talk to your bank representative about what rate changes are likely in bank deposits, fixed income securities and sweep accounts. Each product will have its rate move at a different velocity. It may make sense to further diversify cash investments or expand liquid options, depending on your business’s immediate cash flow horizon and longer-term needs for cash. Evaluate what needs for cash may arise, such as an increase or decrease in workforce, acquisitions, or facility or large equipment needs.

It’s time to take stock of your cash strategy

With interest rate movement a possibility throughout 2020, enterprises should take a more active role in managing their liquidity and short-term investments. In a shifting marketplace, your banker can help you understand what mix of liquidity management solutions best deliver the returns and cash availability your business needs.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Please consult with legal, tax and/or financial advisors. KeyBank does not provide legal advice. KeyBank is Member FDIC.© KeyCorp 2020 CFMA 200221-748090.

Scott Schlange is Senior Vice President and Commercial Banking Sales Leader with KeyBank in Idaho. He may be reached by phone at 208-364-8559 or email at [email protected]