Preparation: The Key to Managing Cash in Uncertain Times

  • By AFP Staff
  • Published: 1/3/2023
The Key to Managing Cash in Uncertain Times

Treasury’s role is to protect corporate assets, even during the most uncertain times. And, as we look forward to 2023, there is plenty to be uncertain about. Interest rates are on the rise, the foreign exchange and commodity markets remain volatile, and economic forecasters are predicting a recession — they’re just unsure how deep it will be and how long it will last. On top of that, the SEC is proposing further reform to money market funds.

Treasurers anticipate uncertainty as they seek to identify and manage liquidity and risk by putting in place policies and procedures that will allow them to manage those corporate assets in a secure way. There are three things treasury practitioners can do now to make sure their short-term investment policies and procedures are fit for purpose.

1. Review the investment strategy

The strategy should set the scope of the company’s short-term investment policy. Some companies have standalone short-term investment policies; others have a comprehensive investment policy for all horizons, incorporating procedures for the management of short-term investments.

A common approach is to stratify cash into two or more buckets (e.g., short-term, operational cash and long-term, strategic cash) with different levels of acceptable risk for each. Some organizations, depending on sector, geographies of operation, and other factors, may decide to broaden the definition of operational cash. The result would be to bring more cash within scope of the short-term investment policy if they feel they need to manage working capital more carefully.

2. Set objectives for each bucket of cash.

For each bucket, the company will need to weigh safety, liquidity and yield to determine its objectives for that bucket. The key is to determine whether the existing approach reflects the company’s overall risk appetite.

For most treasury practitioners investing short-term operating cash, or working capital, follows the SLY approach — safety first, then liquidity, with yield only a factor in decision-making once security of principal and access to funds have been managed appropriately.

Some treasurers may want to consider alternative strategies where money fund investments are not appropriate, whether from a maturity, credit quality or duration standpoint. Looking to alternative investments, including separately managed accounts and other mutual funds, may offer the opportunity to align the investment strategy more closely with the risk appetite.

3. Review the short-term investment policy and procedures.

Assessing the tactical elements is the important last step that allows the investment strategy to be implemented and the objectives achieved. These elements include a determination of the acceptable instruments and counterparties (and associated limits), as well as the mechanics of investing and redeeming cash.

A company’s investment policy should remain relevant as economic, market, and regulations change. This is a good time to revisit the policy to ensure it allows treasury to continue to manage short-term cash in a safe and secure manner, as well as structuring a process in the future.

During the review process, treasurers may determine that adjustments need to be made, particularly if they perceive that the portfolio’s performance against safety and liquidity measures was unacceptable or could be improved.

Want to learn more? Check out the 2022 AFP Executive Guide: Money Fund Reform: The Broader Implications, underwritten by Allspring Global Investments.

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