Managing surplus cash in a low-interest rate environment is a frustrating task for treasury teams. Maximizing returns is an ongoing and seemingly insurmountable challenge. It’s a matter of making sure the cash is somewhere safe and moving on to something else—and it’s hard to get excited when you’re picking up a few BIPS here and there on cash sitting in the bank or in a money fund.
Yes, your cash is safe, but it’s hardly adding value to the company. So if you’re serious about treasury being recognised as a value-adding partner within your organisation, maybe it’s time to think differently about how you manage liquidity and level up your short-term investment strategy.
Here are the steps you can begin taking today.
Level one: bank deposits
Every company leaves at least some cash in the bank. After all, banks were established to store value and cash left in a bank is secure and liquid. But that’s about it. With typically low interest rates, there’s very little return on your investment. In fact, in some countries, banks have actually charged corporates to stash their cash in the bank. According to reports, corporates have finally had enough and are looking for higher-yielding alternatives.
Level two: money funds
Money funds are a great short-term investment tool. They’re popular with corporates in the US, Europe, and gaining ground in Asia. AAA rated funds, which are the most commonly used by corporates, provide the same security and same day liquidity you get with a bank deposit. They also help corporate diversify risk. This is because fund managers spread cash across a pool of assets, rather than concentrate them with a single bank. But again, if you’re looking to do more with your cash, money funds are not necessarily the answer.
It’s also worth noting that the money fund industry is changing. In fact, new rules are being implemented in Europe. These rules force fund managers to remove the Prime Constant Net Asset Value (CNAV) structure used by many corporates. This move comes hot of the heels of changes in the US over recent years. Which combined, are forcing corporates to question the ongoing suitability of the product for their short-term investment needs.
Level three: alternative investments
While most corporates will use bank deposits, money market funds, or a combination of both as their primary investment vehicle, some have branched out to use more complex structures. For instance, some corporates are using repurchase agreements. This is when a company exchanges its overnight or short-term cash for high-quality securities with an agreement that the seller of the securities will buy them back at a specified price and time.
Others are using separately managed accounts, which is when a treasurer mandates its fund manager to buy and sell securities on their behalf. Some corporates are even behaving like fund managers themselves, investing billions of dollars into corporate bonds.
The problem with these options is that they’re not viable for most companies. In some cases, they require levels of investment beyond what most companies have in surplus cash. They also sometimes require complex legal agreements to be created, something that stretched treasury teams do not have the time and resources to commit to.
Level four: Dynamic Discounting
Dynamic Discounting brings together the best of all these short-term investment options—and so much more. By speeding up the payment of approved invoices in return for a discount on goods or services purchased, treasury can earn risk-free returns in excess of 20% APR—an unheard of rate for a bank account or money fund.
But unlike other short-term investment solutions, the value of Dynamic Discounting extends beyond the treasury department. It gives procurement and accounts payable a tool to meet their objectives around cost saving and efficiency. It also supports the company’s entire supplier ecosystem, giving them access to cheap working capital to grow and innovate.
The great thing is any company can take advantage of Dynamic Discounting and achieve all these benefits. Approved invoices, surplus cash, and a best-in-class platform to digitise the supply chain are all that’s needed.
Expert level: a strategic approach
There’s no one-size-fits-all approach to managing liquidity. But the trait that all leading corporate short-term investors have is flexibility. It’s not about just continuing to use a product because ‘that’s what we’ve always done’. It’s about setting investment objectives and building a flexible suite of investment tools to meet these. And if you’re looking to add genuine value to your organization, Dynamic Discounting should certainly be part of the conversation.
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