The trick to managing cash? Be creative.

• Author: Anderson, Alexander M.
• Position: State-of-the-Art Treasury Management

Managing cash may sound like a mundane task, but if you do it well you can transform your cash management function into a corporate profit center.

VERY FEW OF THE responsibilities you face as a financial executive are more important than corporate cash management. You must ensure that sufficient cash is available to fund all corporate requirements, ranging from working capital to acquisitions, equity buy-backs and loan repayments.

Because of the overriding importance of funding such corporate cash needs, most companies don't think of liquidity management as a profit center. But, if you can predict your spending projections reasonably accurately, you can invest cash that you don't need immediately and contribute to your bottom line.

First, examine whether you should revise your liquidity management strategies to take full advantage of today's low interest-rate environment and current market opportunities. An investment strategy predicated on Treasury bills and money-market funds may have produced high yields in the 1980s, but with current yields on these issues now so low, you may find it pays to be more creative.

THE INVESTMENT POLICY ROADBLOCK

Are your investment policies out of date? Most companies' policies are focused on minimizing risk, sometimes allowing investments in only the most conservative of money-market vehicles. If your policies are similar, you may be hindering your cash returns.

For example, some policies contain unnecessarily restrictive average maturity provisions. If you expect your firm's cash reserves to remain on the balance sheet for a period of time you can reasonably anticipate, your investment policy should be broad enough to match the maturity of investments to the date you expect to need the cash. This is especially important in today's environment, given the steep condition of the yield curve.

To illustrate, one company that hadn't reviewed its investment policy in over a decade maintained a 90-day average maturity policy restriction on a large pool of funds targeted for a facility expansion three years away. By extending the investment horizon out to match the three-year cash requirement, the firm generated incremental yield exceeding 150 basis points. Of course, enhancing returns is not always as simple as extending maturities, but this example points out how important it is that you periodically review your corporate investment policy in light of your funding needs and market conditions.

On the other hand...