Cash & Liquidity Management

Managing excess cash… when there’s less of it

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When corporate reserve and excess cash positions are reduced, what can treasurers do to optimise cash holdings? Nikunj Trivedi, Senior Liquidity Advisor, Trade & Treasury Solutions, Americas, BNP Paribas, explores the options.


Nikunj Trivedi, Senior Liquidity Advisor, Trade & Treasury Solutions, Americas, BNP Paribas

Nikunj Trivedi

Senior Liquidity Advisor, Trade & Treasury Solutions, Americas, BNP Paribas

BNP Paribas logo

In 2018, US corporate cash positions fell by around 10%. Tax reforms and the subsequent re-evaluation of offshore cash, boosted shareholder activity (in the form of dividend increases and circa US$1.1trn of planned share buybacks). It also increased paying-down of corporate debt and saw a surge in CapEx and M&A spend.

Although 2019 shows signs of cash holdings rising and deployment levels stabilising, many treasurers are still working with lower overall cash reserve and excess positions. There is continued pressure to sustain healthy levels of onshore cash and cash equivalents as they continue to meet the liquidity demands and capital deployment opportunities of their organisations.

As they do so, prudent treasurers should be seeking clarity over how their banks are dealing with the cash management implications of geopolitical events such as Brexit. Treasurers must also remain attuned to the extra compliance and reporting pressures imposed on business operations by the rapidly evolving financial regulatory environment.

In light of these dynamics, treasurers should be evaluating the most judicious models of managing their cash. Three key questions arise:

  • Is the yield on our cash sufficient?

  • How quickly can our cash be deployed?

  • What investment products meet our policy and comfort levels?

Yield and access

Any decision to re-model will be driven by the prevailing corporate philosophy on safety, yield and liquidity. But rising yields in 2018 have seen treasurers become more active in their cash investment approach. Indeed, higher-return products are back on the agenda although not at the expense of accessibility, which remains paramount.

Re-modelling cash investments thus requires liquidity management discipline. An organisation-specific cash profile and dividing cash into segments according to need, can bring clarity. Typical segments are: operational (sub-30 days); reserve (one to six months); and strategic (six months-plus).

Each segment will inform a different investment solution. Operating cash may be best served by interest-bearing accounts, short-term deposits or government money market funds, all creating an essential ‘liquidity cushion’. From here, and in all cases dependent upon policy approval, reserve cash may be invested in products such as longer-dated time deposits, structured deposits (with bonus yield for non-withdrawal) or repos (higher yield when posting certain collateral).

Strategic cash may suit a separately managed account (SMA). These leverage a professional manager who will seek to further enhance yield through a portfolio of high-quality corporate and government securities. SMAs demand comfort with the asset manager’s investment approach but, within the fee, treasurers could expect regular professional investment management dialogue, access to credit analysts, and possibly some flexibility around cash withdrawals.

In the current environment, treasurers taking a more active approach to cash investments could generate some beneficial outcomes. When even a simple revamp of investment policy can harvest a 45 basis-point pick up on yield, it’s a discussion worth having.

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