Let’s Talk About Cash: It’s Time to Ask the Right Questions about Liquidity Strategy
With the Fed halting interest rate hikes, the party is over when it comes to increased yield in the near-term. That means that for many companies, the time is right to revisit cash management strategies and investment policies. While each company’s liquidity needs are unique to its business plan, industry, and even season, one thing is universal: the need to have a balanced strategy that optimizes near-term goals with long-term risk and returns.
Taking Stock of the Economic Environment
Macroeconomic factors such as interest rate and monetary policy set the stage for what businesses need to consider when developing their working capital management strategies. In June 2019, the Federal Open Market Committee held rates steady but indicated a willingness to drop rates before the end of 2019 should the economy show signs of weakness. Fed funds futures, an indicator of where Federal Reserve monetary policy is going, currently project a cut in the Fed Funds rate in July 2019. In addition, the flattening yield curve does not incent treasury staff to place funds in longer-term instruments.
Now that future rate hikes are not expected in the near-term, and a rate decrease may occur before the end of 2019, should practitioners think differently about investing excess cash? The answer is yes. According to George Mohan, Managing Director of Fixed Income Sales for KeyBanc Capital Markets,® the bond market is anticipating lower yields, as evidenced by the inverted yield curve.
Economists surveyed by Bloomberg are predicting a 93.3% chance of a Fed cut in rates and a 0.0% chance of a Fed increase in rates over the next year.
Based upon the current market conditions, clients that are sitting on excess cash should consider laddering funds into fixed income instruments that match their investment policies, including U.S. Treasury securities, commercial paper, and CDs, for example.
If rates fall this year, keeping cash in indexed solutions may not result in increased return. If a company is looking for yield but also wants to keep some funds liquid for near-term needs, it may require practitioners to reevaluate their investment policy, risk tolerance, and mix of liquidity vehicles.
Understanding the Cash Continuum
As your business decides a balance of liquid and longer-term investments, you need to take stock of what needs you may have for your cash. Additionally, understanding where each investment falls on a continuum of availability, duration, and yield can help you achieve a healthy balance of operational, reserve, and strategic cash strategies.
Ask and Answer: How to Evaluate your Cash Management
It’s time to take stock of your company’s working capital strategy to evaluate whether it’s optimized for the current economic environment. Start by asking these questions:
- Is your firm’s short-term investment approach active or passive? Optimizing your accounts doesn’t necessarily mean an active approach, in which your financial officers track the market and accounts and make daily trades. Today, liquidity strategies that employ automation make it possible to be less hands-on and still maximize yield.
- Do you have the in-house expertise to manage your liquidity?
- Does your company have an investment policy that prescribes your risk tolerance and diversification requirements? If not, what is your risk tolerance and need for diversification? If you do have a policy, does it need to be amended?
- What are your business’s unique needs for liquidity in the next several months, year, or two years? Are you planning to expand to new locations, hire more employees, be active in mergers or acquisitions? Is your organization’s liquidity need seasonal or cyclical—are there certain times of year when you make more capital expenditures, for example, to improve facilities or increase staffing?
- Are you using the right liquidity solutions? New hybrid products make it possible to structure your deposit accounts in more optimal ways, for example, automatically calculating how much balance is needed to offset fees while earning interest on the excess funds. Various sweep account options, including bank deposit sweep, credit sweep, and money market fund sweep, can be another way to optimize return on idle cash.
- Are you making the most of your bank relationships? Your commercial bank should have a holistic view of your business, understanding your cash flow, need for liquidity, and how best to achieve your overall financial goals.
- Does your investment policy address market risk? Can the liquidity you have tied to corporate debt withstand market uncertainty and volatility?
In today’s rate environment, the benefits of active liquidity management are more apparent than ever. KeyBank offers liquidity management solutions that efficiently manage your short-term cash and deliver optimized results.
To learn more, visit key.com/payments.