Cash management for the best of times and the worst of times
02 November 2021
What are the main elements of a corporate cash management strategy? We look at how businesses can put their cash to work most efficiently.
4 min read
The Covid-19 pandemic has delivered a period of profound disruption, accelerating structural trends and delivering the ultimate stress test for business models. Meanwhile, the current global supply chain crisis underlines how a Covid legacy is already redefining the economic outlook.
While the pandemic has negatively impacted some businesses, others have adapted and thrived in the new environment. This tale of two pandemics was reflected in companies’ cash reserves, as some businesses were forced to dip into their emergency pots over the last year, while others stowed record amounts away.
In September, Investec commissioned a survey of 100 senior executives at UK companies with at least £5 million in cash reserves – and an average of £62 million. The findings revealed a significant impact on company cash reserves and demonstrated how the pandemic has impacted and reshaped cash management strategies.
Overall, the majority of companies (58%) saw cash reserves increase over the course of the pandemic. Of the 100 executives surveyed, one in five (17%) said their reserves have increased by 40% or more compared with a year ago, while one in six (16%) indicated cash reserves are now at an all-time high.
Not only is cash needed for day-to-day business operations, but it is also core to the long-term strategy of a business, and the reasons behind the increases in reserves vary. The majority of companies (58%) reported benefiting from the crisis and increased revenues. However, more than half (51%) said cancelling investment projects had boosted reserves, and 44% attributed higher cash levels to cost-cutting.
An overwhelming majority of businesses (82%) reported cutting back on strategic investments during the crisis.
Indeed, an overwhelming majority of businesses (82%) reported cutting back on strategic investments during the crisis, with one in five (20%) reducing investment by 20% or more compared with 2019. Another one in three (34%) went one step further, selling assets during the crisis, which boosted their cash reserves. Meanwhile, 17% said government crisis loans allowed them to put aside more cash.
On the other hand, 38% of companies saw cash reserves fall during the past year, with 9% saying they had dropped by 30% or more. About three-quarters (73%) of these businesses were required to dip into their reserves to meet day-to-day running costs during the crisis, while 58% were also forced to fund projects they were committed to but no longer had the full funding for.
Many companies are cash-rich following the crisis and nearly three out of five now plan to keep more cash on reserve, so they are in better shape when or if the next crisis or unforeseen event comes.
Considering the depth of the pandemic and its impact on businesses, it was encouraging to hear that nearly half (46%) of corporates and large SMEs expect business investment to return to pre-crisis levels by the end of 2022 – and about 10% believe this could happen before the end of this year. Just 16% expect it to take three years or more for the investment recovery, with 35% saying they will be back at pre-crisis levels by 2023.
And while many businesses did struggle, the picture ahead is positive. More than half (52%) of companies surveyed expect cash reserves to fall over the next six months, with a resounding 81% saying they will use them to fund significant growth plans.
Meanwhile, of the 22% expecting reserves to increase, an emphatic 82% attribute this to the strong growth of the business.
73% of corporates have explicitly stated their intention to boost cash reserves, which bodes well for business resilience in the long term.
The coronavirus crisis has also led many businesses to think more prudently about the future to better prepare for unforeseen events. Nearly three out of four (73%) corporates and large SMEs have explicitly stated their intention to boost cash reserves for this purpose, which bodes well for business resilience in the long term.
Contingency planning is a crucial function of cash reserves. Companies must ensure their cash management strategy is aligned with their risk tolerance policy, while ensuring the business is strategically maximising flexibility and liquidity where possible. When used appropriately, cash can add value beyond its basic operational function, providing ongoing liquidity, funding and returns.
When used appropriately, cash can add value beyond its basic operational function, providing ongoing liquidity, funding and returns.
FJ Eigelaar, Head of Client Group Funding at Investec, said: “Many companies are cash-rich following the crisis and nearly three out of five now plan to keep more cash on reserve, so they are in better shape when or if the next crisis or unforeseen event comes. This should mean increasing the emphasis on cash management and ensuring reserves are in the best possible range of accounts so companies can react appropriately.
“To optimise cash management, treasurers, CFOs and financial directors should look to more holistic planning and guidance to ensure they are matching day-to-day cash management forecasts with longer-term strategic funding and liquidity goals. At the heart of a sustainable and robust business lies a healthy cash management plan.”
As companies prepare for a resumption in investment and growth, this will require careful planning from treasury departments.
UK companies plan to switch a quarter (26%) of their cash reserves on average over the next six months in search of higher rates.
According to the survey, UK companies plan to switch a quarter (26%) of their cash reserves on average over the next six months in search of higher rates – with 27% planning to move 30% or more of their reserves.
However, rates are not the only consideration for corporates managing cash reserves. About 87% of companies said an approved treasury mandate was the most important factor when choosing a provider. Other factors scoring highly included access to a relationship manager for advice (77%), provider’s credit rating (72%), the flexibility of terms and conditions (68%) and ability to manage cash online (66%).
Eigelaar said: “Providers need to offer more than just competitive rates to win business and attract new customers. It is arguably more significant that so many companies believe the service they receive from providers is average or poor, which is worrying when cash management is very important for businesses.”
Indeed, the study found that only 23% of companies rate the service they receive from providers as excellent and 48% regarded the service including the rate as good. In comparison, 27% rated it average or poor.
Companies should seek guidance and look to diversify counterparty risk, as well as sources of yields.
For cash to work more efficiently, companies should seek guidance and look to diversify counterparty risk, as well as see it as a source of yield.
We believe the foundational pillar of a sound cash management strategy is diversification. Attaining high yields is important, but banks that offer higher yields usually pay a premium because of the increased level of risk attached. In this context, having a basket of different yield sources with varying maturities is prudent.
By constructing a holistic and diversified cash strategy, your company will be able to weather future uncertainty as well as unlock the next stage of growth.