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Institutional Solutions

Cash Management

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 Horizon0-6 Months6-12 Months12-24 Months24 Months +
CategoriesRegular access to cashOccasional access to a portion on cashVariable accessibility based on investment policy statementVariable accessibility when all other forms are unavailable
FocusLiquidityLiquidity and returnsOptimize returnGrowth 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
Credit RiskRisk that a security’s value will change due to a ratings downgrade or, in the case of a distressed security, default
  • Rating Downgrade

  • Default

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
  • Change in interest rates

  • Change in yield curve

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
  • Secondary market availability

  • Closed or open ended funds

Spread Risk
Risk of change in value of a security due to a change in the relative spreads in the market
  • Hybrid of credit and liquidity risk

Systemic Risk
Inherent risk with investing reflecting the impact of economic, geopolitical, and financial factors
  • Total market volatility

  • Typically unavoidable

  • Systemic change

Unsystematic Risk
Company or industry specific risk
  • Fundamental health of the specific investment

  • Health of the sector an investment is in

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

Contact our Team Today for Your Cash Investment Policy Statement

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