New World of Cash Management
Cash management is changing. Cash used to be considered a “low/no risk” investment. As markets and economies evolve, now is the time to be evaluating cash management strategies and the true definition of risk - Not meeting your goals.
CFO's, VPs of Finance, Treasurers, and financial decision makers, are discovering new opportunities to be more dynamic and flexible in their approach to cash management. Having a documented policy for the administration of the institutional cash is among the most effective means of risk management, serving as a clear and constant reminder of the organization's firm’s goals and ability to tolerate risk. Having an Investment Policy Statement (IPS) should be part of every firm’s risk management protocol, incorporated into an annual board review process (typically by the audit committee) and updated on a regular basis.
Cash Flow
Cash flow forecasts, including payroll, buyback plans, shareholder dividend payments, covering specific expenses, as well as any other data that could affect the level of cash on the balance sheet, to quantify how much cash is available for strategic investment.
Priorities: Determine what the primary goal of the cash will be. When and how the cash will be deployed. There are 3 main priorities of cash:
Operating cash: Working capital required to meet daily needs of the organization.
Core cash: Generally earmarked for unknown future needs of the company.
Strategic cash: The stable balance sheet assets not intended for specific expenditures. While still conservative by nature, strategic cash—which typically has a longer time horizon than operating cash or core cash— might have more of a total return objective.
Long Term Investment: Cash of the longest time horizon that may require a more diverse investment strategy to meet goals.
Operating Cash | Core Cash | Strategic Cash | Long Term Investment | |
| Time Horizon | 0-6 Months | 6-12 Months | 12-24 Months | 24 Months + |
| Categories | Regular access to cash | Occasional access to a portion on cash | Variable accessibility based on investment policy statement | Variable accessibility when all other forms are unavailable |
| Focus | Liquidity | Liquidity and returns | Optimize return | Growth for long term goals |
Risk Tolerance
Leadership must determine if the key priority is preservation of capital or maximization of returns. This determination may be made for cash as an asset class or for each category of cash the company maintains (i.e., operating, core, strategic, long term). Primary forms of risk stated below:
Primary Risk | Definition | Factors |
| Credit Risk | Risk that a security’s value will change due to a ratings downgrade or, in the case of a distressed security, default |
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Interest Rate Risk | Risk that a security’s value will change due to a change in interest rates or the shape of the yield curve |
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Liquidity Risk | Risk that arises from the difficulty of selling an asset; security cannot be bought or sold quickly enough to prevent or minimize a loss |
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Spread Risk | Risk of change in value of a security due to a change in the relative spreads in the market |
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Systemic Risk | Inherent risk with investing reflecting the impact of economic, geopolitical, and financial factors |
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Unsystematic Risk | Company or industry specific risk |
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Portfolio Objectives and Considerations
Objectives: Can be quantitative (e.g., seek returns that exceed a defined market hurdle) or qualitative (e.g., focus on safety and liquidity). The objective should be specific enough to guide the company’s choice of investments, but flexible enough to allow the company to take advantage of tactical opportunities that the cash and fixed income markets might present. Common objectives may be one or multiple and include but are not limited to:
Preserve principal
Meet forecasted cash flow needs
Provide income/yield
Provide tax-advantaged returns
Deliver prudent, risk-managed total return
Seek above-benchmark returns
Provide increased levels of diversification
Benchmark: Offers a means for comparing and measuring portfolio performance and risk. Benchmarks are not targets for performance. Generally speaking, every benchmark should be transparent and measurable, meaning it should comprise well-defined securities with readily available prices quoted on a daily basis. By definition, a benchmark must exhibit a certain level of comparability with the portfolio’s makeup (in terms of type of securities held, asset allocation and duration) in order to effectively convey risk.
Investment Manager: Primary entity responsible for management of cash accounts. Leadership will determine if cash management will be handled internally or if a professional partner will be obtained.
Rebalancing and Monitoring: From time to time, market conditions will cause your portfolio’s investments to vary from the original allocation that we established. In an effort to remain consistent with goals, investments shall be periodically reviewed to ensure they are still meeting the goals of leadership and the investment policy statement.
The designated internal responsible for investment management or the selected investment advisor is responsible to assist leadership in making an appropriate asset allocation decision based on the particular needs, objectives and risk tolerance of the organizations.
The selected individual will be available on a regular basis to meet with the leadership team and periodically review the portfolio for suitability based on information provided by leadership. Leadership is responsible to provide all relevant and accurate information on financial condition and risk tolerances, and must promptly provide notification of any changes to this information.
Potential Investment Categories
Potential investment category options to be determined by priorities, risk tolerance, and objectives. Investment categories to consider but not limited to:
Bank Loan
Corporate Bond
High Yield Bond
Inflation Protected Bond
Intermediate Core/Core Plus Bond
Multi-Sector Bond
Nontraditional Bond
Short Term Government Bond
Short Term Bond
Ultrashort Bond
Money Market
Dividend Paying Securities
Target-Date Funds