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With interest rates falling, now is the time to reevaluate your balance of liquid assets and long-term investments. More than ever, the combination of decreasing interest rates and 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 leave companies without sorely needed liquidity when they need it most.

What’s shaping this sharpened need for a proactive approach? At its October meeting, the Federal Reserve Board’s Federal Open Market Committee cut the benchmark rate for the third time this year.1 Economic uncertainty is heightened because of the ongoing trade wars between the U.S. and China, weaker global manufacturing activity, and a slowdown in corporate earnings due to rising wages and other contributing factors. With so much in flux, financial officers should 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 increase or decrease in workforce, acquisitions, or facility or large equipment needs.

It’s Time to Take Stock of Your Cash Strategy

With interest rates flat or falling, enterprises should take a more active role in managing their liquidity and short-term investments. In a shifting marketplace, KeyBank can help you understand what mix of liquidity management solutions best deliver the returns and cash availability your business needs.

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This document is designed to provide general information only and is not comprehensive nor is it legal advice. If legal advice or other expert assistance is required, the services of a competent professional should be sought. KeyBank does not make any warranties regarding the results obtained from the use of this information.

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