Investing excess corporate cash.

• Author: Seidner, Alan G.
• Position: Includes related article

The investment of corporate cash doesn't always get the attention it deserves. Here are some basics on how to maximize return with little risk.

In the corporate treasury environment, treasury staff managers have responsibility for a number of activities, including, among other things, collections, disbursements, bank relationships, borrowing, and-of course-the investment of excess cash. With the pressure of all of the managers' other responsibilities, the investment of cash often falls to the bottom of the list of priorities, and managers come to rely on securities salespeople or on the investment departments of the banks with which their companies do business.

But, by abdicating responsibility for the investment of excess cash to others, and by not attempting to improve their own knowledge of the techniques and financial instruments that are best suited to such investments, they may expose their companies to loss and their superiors-and themselves-to embarrassment.

The cash cushion:

Excess cash typically refers to a surplus of cash resulting from company operations or the proceeds of the sale of a major asset-in other words, cash that is the product of normal business activity that is being held until it is used to pay down debt or reinvested in a long-term investment. In addition, there are circumstances in which companies find it advisable to maintain a certain amount of excess cash to meet unusual needs, even if they borrow funds regularly through lines of credit at banks or commercial paper or other forms of debt.

A cash cushion is often advisable because a company may not always have access to capital when it needs it. For example, if the company has an opportunity to purchase a large quantity of raw material, a capital asset, or other business opportunity with short notice, it may be difficult to arrange for the additional credit. There are also situations in which revenue falls suddenly as a result of a breakdown in the delivery of the company's product, for example, or problems with a billing system, or a labor dispute. And, if the company's earnings are down or its industry is in disfavor, the treasury manager may not be able to renew or expand credit lines or go into the commercial paper or corporate debt market. Finally, the company that has gone to the top of its borrowing lines or is negotiating to expand them will need a cushion of cash to meet liquidity requirements until the credit is secured.

So excess cash is, in effect, an insurance policy to cover the risk of a liquidity crisis. The cost of this insurance is the lower yield the company earns on the investment of its portfolio in reasonably secure, liquid...