Secrets of the best companies for cash allocation: one question for financial executives who have survived the liquidity crisis is what to do with excess cash. Here are five steps that will enable corporate leaders to best allocate their resources.

• Author: Raiswell, Lim
• Position: Finance Best Practices

Excess cash deployment is back on the agenda for most large public corporations. Despite helping their companies survive one of the most pronounced liquidity crises in living memory--and doing so by being prudent and holding on to cash--financial executives are now concerned about what to do with excess cash.

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Unfortunately, many finance teams do not have all of the requisite tools to support cash allocation decision-making effectively. They tend to make several common mistakes:

* Deliver capital planning presentations that are too complex and do little to educate decision-makers on the company's true risk appetite;

* Use different criteria for each cash allocation decision so it becomes difficult to weigh the relative pros and cons; and

* Fail to distinguish between types of cash. For example, cash "trapped" overseas has a repatriation cost attached to it and takes longer to access.

One result of this lack of clear guidance into cash avail-ability and the relative merits of different allocation options is often what can be referred to as "cocktail party decision-making." In the absence of clear guidance from finance, the chief executive or board of directors use other Information at hand to inform a decision, like benchmarking versus other companies in the industry or banker advice. Both are useful sources of information but should not be used independently of the financial goals and limitations of the company.

The root cause of these mistakes at many corporations is the belief that cash allocation is a financial problem and should sit with finance. Capital allocation decisions impact most senior managers and all investors; these stakeholders should share in the vision for how the C-suite intends to boost returns on capital.

As such, capital plans and how they are communicated need to be tied to clear goals that reflect the interests of the beneficiaries, whether they are business managers, board members or investors.

Over the course of the last decade, the Corporate Executive Board has worked with thousands of senior financial professionals to determine how the best companies and their executive teams tackle common problems. When it comes to allocating cash, the best executive teams get five things right.

They use a rolling liquidity plan to create a shared C-suite/board vision for risk tolerance.

A good liquidity plan takes a long-term view, is refreshed periodically and establishes optimal liquidity based on...