Is it time to update your business’s liquidity management strategy?
The federal funds rate is a key factor in how businesses manage their operating, excess, and strategic deposits. In July 2023, rates reached a 22-year high due to a series of increases by the Federal Open Market Committee to bring down soaring inflation. Under these circumstances, maintaining a liquidity strategy designed for a low-rate environment could be costing your organization real money.
To evaluate your approach to liquidity management and determine whether it meets your current business needs, consider the following questions:
1. How do I know when my liquidity strategy needs to be reviewed or refreshed?
Analyze the accounts and investment vehicles in which you keep your funds today, making note of how quickly you can access those funds and what the rate of return is for each account. If those attributes are not aligned with your objectives for the business or compare unfavorably with the return you’re seeing from other accounts and investment vehicles, it's time to explore alternatives that better meet your needs.
2. I’ve heard people say, “all cash is not created equal.” What does that mean? How should I be thinking about deposits in our company’s different accounts?
Review your accounts and determine a strategy for each one. You should have a mix of accounts used for daily working capital, cash held on behalf of others, and cash that is on deposit to meet a longer-term strategy. Make sure that your cash strategy and account structure take this into consideration, and then consider changing providers and reallocating funds to maximize the way your deposits meet those objectives. For example, while some banks cease paying interest on bonds once the fees to the bank have been covered, KeyBank has made it possible for clients to earn interest on bonds even beyond this point.
3. With interest rates expected to remain high for the foreseeable future, how do I ensure I am managing my operating, excess, and strategic deposits in a way that provides the maximum benefit to my business?
Take steps to optimize your deposits with four key factors in mind: debt, taxes, interest income, and need for liquidity. Servicing debt can become more difficult in a high-interest rate environment, as the rising cost of paying down debt isn’t offset by increasing revenue1. Keep in mind, also, that debt modifications undertaken to address high interest rates can have tax implications2. High interest rates may also constrain consumer and business spending, making it crucial for organizations to optimize other revenue streams — like interest income — to compensate. Finally, unfavorable macroeconomic conditions can lead to buying opportunities, so it’s important to ensure you have funds at the ready when a deal presents itself and that your banking partner is accessible, responsive, and agile.
4. What cash and liquidity questions should my banker be asking me right now?
In times of uncertainty and volatility, your banker should be asking you if the way your money is being managed aligns with your short-term goals. For instance, high interest rates have made access to cash a challenge for many businesses. If a potential acquisition target approached you with an opportunity to invest, partner, or purchase, would you be ready to pull the trigger? When circumstances are shifting, agility is key.
5. Our company is considering moving excess funds to a global systemically important bank (G-SIB) and/or diversifying our funds across multiple regional banks. Is that necessary?
The failure of several regional banks in early 2023 put corporate boards on edge. But it’s important to remember that while the stated limit of deposit insurance provided by the FDIC is $250,000 per depositor per bank, the agency routinely makes whole all depositors of a failed bank3. That doesn’t mean, however, that organizations should throw caution to the wind when choosing their commercial banking partners. KeyBank’s parent company, KeyCorp, is considered a Domestic Systemically Important Bank (D-SIB). This makes KeyBank subject to the most stringent annual stress test conducted by the Federal Reserve.
6. Fraudsters are more sophisticated than ever. What do I need to do to make sure that all our accounts are safe?
Education, prevention, communication, and asset management are paramount. Make sure your employees know how to spot a scam, ensure that systems are protected by robust cybersecurity solutions, and minimize the amount of sensitive information held on equipment used off-premises (like laptops and thumb drives).
Most important, when you suspect you may have been the victim of a cybercrime, contact your bank immediately. KeyBank has invested in tools to combat all manner of cyberthreat, and upon learning that a customer has been targeted, deploys experts and resources to thwart the criminal(s) and restore the customer’s normal banking services as soon as possible. This accessibility, responsiveness, and agility are what set KeyBank apart from larger competitors.
KeyBank’s full suite of integrated payment solutions is delivered by a dedicated team of local experts. To learn more or to speak to one of our experts, visit key.com/commercial.