Making the most of surplus cash

AS THE GLOBAL economy picks up and companies build up liquidity and cash reserves, many of them are looking to the next step: how to improve returns from surplus cash.

With cash forecasting having been the focus for the past few years – when companies worried about scarcity of bank credit during the downturn and how to husband their cash resources – those that now have a clear picture of their flows can start to look at improving the process by which they invest that cash for the short term.

If corporate treasurers wait for cash position information to flow into treasury systems and then spend time researching investment decisions and calling up banks for pricing, they might lose a day's float. By automating this process, they can increase returns on short-term liquidity, cut out the float that is left if they don't concentrate and invest their offset position within the company's varied global entities.

Andrew England, head of product management at Deutsche Bank, relates the growing interest in this process to companies' persistent caution about investing for growth and desire to sweat higher returns from the cash that they are hoarding: "If you look at the current corporate space, companies have more cash at their disposal," he says. "They are putting more attention on collections and paying down debt, and there is not so much borrowing going on in bond markets. Companies are generally building up liquidity. The next step will be to look at what they are going to do with that extra liquidity, and one option may be to look at building on their short-term investing strategies."

There are three options for automation of investment management. One is having access to online trading systems that connect directly to a company's accounts so funds can be invested in real time, settlement and confirmation can occur and information be fed back to the company's in-house systems in real time.

The second option involves setting up automated investment guidelines, according to which cash is automatically invested in certain pre-approved vehicles on a daily or weekly basis. This means that companies can sign up for a short-term investment option – primarily money market funds at the moment – where liquidity would automatically be invested. This would involve moving liquidity into one single account at certain pre-approved cut-off times and having funds automatically invested in the requested products.

The third option involves outsourcing the investment management process to a bank. The bank would automatically invest short-term cash for the company following specific guidelines.

There are a multitude of benefits for companies that decide to streamline this process, such as unlocking value in cash across the organization, increasing yield, and reducing costs associated with investment. In addition there are the advantages of removing the possibility of human error and minimizing other risks, improving straight-through processing, and freeing up time to work on other areas.

Given the range of options, corporates need to establish clearly what their goals are before taking any kind of decision. One market player says: "Is it to free up resources on their end, to do the same things as now but increase returns on short-term liquidity, or is it that they want to have liquidity available as quickly as possible? All of these will affect when and how they choose to automate."

The next step is to ensure that there is a clear picture of the cash to be used for investment. Karin Flinspach, head of liquidity and investment, Citigroup Global Transaction Services EMEA, says: "Companies really need to have a good understanding of the cash that they have. They must get a picture of how quickly they concentrate and invest and what efficiency gains are being realized versus what could be realized. Most companies think that they are really efficient but there are always countries out there that haven't been included in their pool, for example."

John Gibbons, managing director, working capital cash flow advisory, at ABN Amro, says that in a recent survey the bank found that clients' forecasting accuracy reduced from 72% out one week to 56% out two weeks. "So the number one reason why cash managers are inefficient investors is because they are inefficient in their cash management," he says. "If we can help them become better cash managers by giving them a better overview of their predicted flows, that will solve one big problem."

So before taking a step forward to invest more efficiently in the money markets, companies must first take a step back and ensure that they don't miscalculate the funds available to invest.

England at Deutsche adds: "The most important thing that a company must do is to make sure that its required liquidity remains in the account to ensure that its payments do not get compromised."

Typically, cash managers continue to be concerned with liquidity and safety, not yield. So concurrently they are concerned with efficiency. Gibbons says: "We want to make the aggregation of cash as easy and efficient as possible, thus putting them in the best position to consider their investment management strategy."

But, says St John Potter, regional manager for liquidity & investments, EMEA, at JPMorgan, liquidity concentration is fairly well established now, and corporates can look towards the next step. Outsourcing liquidity investment is a big stride.

"With investment management, where risk/return plays are a judgment call, you have all sorts of different views out there," he says. "By putting money with different banks you can play a relationship game and get credit or other services and products, so to give up the investing process to just one bank might not be something all clients are willing to do. And clients who are considering it are then looking for a high degree of flexibility."

Thus for some, keeping investment decisions in house is crucial.

For those companies that want to maintain control over the investment process, the question becomes how to make that process as efficient as possible. This is where systems providers can help. Most international cash management banks, trading platforms and in-house system suppliers are now connected on one level or another – if they were not they wouldn't last long in the global marketplace.