Best Practices in Managing Excess Cash

Companies can improve yield on excess cash, but doing so without sacrificing liquidity or taking on too much risk requires sophisticated processes and tools.

As we reported last month, a recent PwC survey found that even as companies stockpile cash, few treasurers are shifting portions of their portfolio into riskier investments to increase the yield they're earning.

Three-quarters of the survey’s respondents said their company’s cash as a percentage of total assets either increased or remained the same over the past year, whereas fewer than one-quarter (22 percent) said that ratio has decreased. As they decide where to park this cash, survey respondents’ primary goals are preserving principal and maintaining liquidity. Maximizing returns placed a far-distant third.

T&R:  So, what are best practices in managing the risk and performance of a corporate excess-cash investment portfolio?

PF:  Well, some companies that are measuring performance are just looking at the return on their assets. Instead, at a minimum you would want to establish a benchmark. You would want to say, ‘Here’s our investment strategy; here’s our asset allocation. For this type of strategy and allocation, we would expect to get certain returns based on different benchmarks that exist.' Looking at returns versus expected returns based on a benchmark, even on a notional basis, would be the first step.

But then you might have another tranche of investment balances that is more medium-term. This might be cash you’re going to use for big capital expenses or for a deal of some sort, or that you might need to provide a buffer against a downturn in the business. Maybe you would decide that you need to be able to tap into this cash in no less than three months but no more than a year out. So you would want to have a separate investment strategy for that segment.

And then you might have another bucket that is truly excess cash. You might not have it earmarked for anything, and you might know you’re probably not going to need it within the next year. So you’d have a different set of strategies around that.

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