It’s a whole new ballgame. Are you ready to play?
Until the last year or so, managing short-term cash investments didn't require much analysis and effort, as the opportunity to enhance yields was limited. After an extended series of short-term interest rate hikes, however, and changes in regulations governing money market funds, that picture has changed and savvy financial professionals are now evaluating ways to optimize the use of cash accordingly.
The balancing act
Whatever the future holds for interest rates, multiple and distinct opportunities exist today to squeeze more mileage out of available cash. Choosing among them requires carefully balancing the goal of maximizing yield with satisfying liquidity and safety requirements. Performing that balancing act begins with a fresh review of the sources of your current cash balance and how you are using it.
Each source has its own implications for understanding your situation. For example, depending upon the regularity of your gross revenue and expenses, cash generated from operating accounts could be very reliable—or the opposite.
Cash from earnings credits could be very predictable if the assets generating those earnings are equally so. Interest rate fluctuations generally impact this source of cash.
Cash from outstanding debt must be evaluated according to the cost of that debt and loan terms.
That first step of your analysis will produce a general dynamic perspective on your short-term cash. The second step is to compile an investable cash profile taking into consideration the size of the cash portfolio, your time horizon and your goals for a return on that cash.
Finally, the third level of analysis to apply in determining how to optimize your use of cash is to gauge your risk appetite, including your sensitivity to price loss and your confidence in your assessment of your liquidity needs.
An institutional money manager can guide you through the steps of your liquidity needs analysis and optimization process, and help you consider three types of liquidity products. Yields on these vehicles will generally increase as you go down the list:
- Immediate liquidity products include bank deposits, money market funds invested in government agency securities, and prime money market funds, invested in a combination of government and top-rated corporate notes.
- Ultrashort-term liquidity products include enhanced-cash taxable and tax-free separately managed accounts (SMAs).
- Short-term liquidity products include managed certificate of deposit (CD) portfolios, short-term government-only SMAs, short-term government and private-issue blended security SMAs, and short-term corporate SMAs.
A broadening array of available solutions
Cash is the lifeblood of your business and increasingly less of a cheap commodity whose utility and availability can be taken for granted. As you give cash its due and manage your liquidity needs accordingly, take advantage of the broadening array of available solutions, and seek the support of an institution that can help you put together all the pieces of the liquidity management puzzle.
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