Covid-19: Dependable cash management in uncertain times

28 Apr 2020

FJ Eigelaar

Head of Money Market Sales

The coronavirus pandemic has disrupted the finances of businesses across the UK. For many firms, the most significant impact has been felt on balance sheet liquidity, supply chains and cash management. We explore what companies should be thinking about when looking after their cash in times of change.

At a time of financial and economic stress, chief financial officers, treasurers and financial directors must ensure cash and liquidity is managed efficiently across the whole business. This means putting in place a cash management and treasury policy that is aligned with individual company risk tolerance while ensuring the business is strategically maximising flexibility and liquidity where possible.
 
The good news is that cash is often overlooked as an asset class, which – when used accurately – can add value far beyond its operational function. Indeed, during times of stress, it can act as a dynamic asset class providing ongoing liquidity, funding and returns to help boost business resilience.

Navigating the cash crunch

We think of cash as having two core functions. The first is the use of money for regular day-to-day activities of a business to serve ongoing costs and commitments, such as payments to suppliers. The second is the provision of long-term strategic cash solutions that can enable flexibility.
 
A prudent cash management strategy should provide sufficient access to your assets when needed, but also have an aligned framework around longer-term goals and objectives. To help you better understand how cash management can help navigate elevated uncertainty and mitigate business risk, we set out some of the key questions to consider.

Have you reviewed your treasury policy?

Cash is the oxygen for all businesses and is crucial to sustainable growth. It is important to evaluate your treasury policy as the economic picture evolves to ensure efficient oversight of cash management.
 
For some businesses, a treasury policy may only extend to foreign-exchange cash management around hedging. However, we believe a more holistic approach can help businesses better navigate uncertainty. This means having oversight and a strategic mandate to manage ongoing liquidity provision and long-term strategic funding. This can give you a better overall picture of risk and indicate whether you are putting your cash to work in the most efficient manner.
Cash categories

Who are you leaving your cash with?

Are you comfortable with the credit status of your banks? We are seeing clients become more attuned to who they leave their funds with. At a time of elevated financial stress, it is crucially important to get on the front foot and take stock of the counterparty risk within your cash management strategy.
 
Are the key stakeholders aware and comfortable with the current credit ratings and liquidity positions of your banking institutions? As a treasurer, CFO or finance director, should you review this?
 
When assessing credit ratings, it is prudent to use multiple indicators as measures of risk. For example, what is the credit quality of the institution, and, crucially, what is the probability of default? You should also assess the capital adequacy of institutions where you have put your cash – are there appropriate buffers to ensure your money will be protected? At Investec, we are on hand to guide you through this complexity.
 
At a time of elevated financial stress, it is crucially important to get on the front foot and take stock of the counterparty risk within your cash management strategy.
 
We believe the foundational pillar of a sound cash management strategy is diversification. This means assessing whether you are allocating just based on the highest rate, or carefully diversifying exposure across a spectrum of institutions to optimise the mix of return streams.
 
By diversifying your cash portfolio, we can help you optimise risk and return outcomes depending on your individual risk threshold. Attaining high yields is important, but usually, banks that offer higher yields are paying a premium because of the increased level of risk you are taking on. We believe having a basket of different yield sources with varying maturities is prudent – and making sure you are conservative when accessing products from unrated providers.
 
While the current crisis is not a financial sector credit crunch, as we saw in the 2008 financial crisis, the fall-out is likely to impact banks as economic conditions worsen. So the security of your cash should be on your treasury radar.

What do you need the cash for?

When appraising your treasury policy, it is vital to forecast as accurately as possible. This will help you decide how much cash you want to strategically allocate and determine appropriate terms and maturities on interest-bearing accounts that suit your medium and longer-term goals.
 
Again, we think businesses should focus on both the day-to-day operations and the longer horizon funding and liquidity goals. Companies must also take precautions and have contingency liquidity for unforeseen events over the coming months, as further disruption across supply chains must be anticipated.
 
By reconciling both the short-term and longer-term needs of your business, you can unlock efficiencies and flexibility. By taking this holistic view of cash management, businesses may also find more tailored solutions best suit their needs.
 
For example, our Access 50 account allows you to place 50% of your initial deposit on an instant access basis and the remaining 50% on 32-day terms within the same product, providing a considerable premium above that of stand-alone instant access deposits. This helps you strengthen your cash position, capture yields and still maintain appropriate liquidity in the event of further disruption. These types of accounts were popular during the global financial crisis when companies were seeking returns while still being able to call on cash. 

What are deposit rates doing across the market?

We are currently seeing elevated rates in the market due to the additional stress on liquidity following the onset of the crisis. With more institutions competing for more limited funding resources, businesses have benefitted.
 
The positive for companies is that despite the rate cuts by the Bank of England in the wake of the crisis, the same pre-crisis rates can be accessed due to diminished liquidity. The yields will, of course, vary according to terms and maturities.

Will your cash management strategy need to change?

We believe companies will seek to streamline businesses in the future. In this evolving environment, cash is going to take on even greater importance as companies try to navigate a challenging economic outlook. For cash to work more efficiently, companies should seek guidance and look to diversify better counterparty risk, as well as sources of yields.
 
In this environment, unrated and lower-rated institutions will face greater scrutiny. Companies should remember there are specialised business-focused banks with strong credit ratings away from the high street names, which can deliver relatively strong returns in the current funding market.
 
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.
 
There is also the temptation for many businesses to raise capital to navigate the uncertain road ahead. While additional capital might be imperative in some cases, it is essential to weigh up the future cost of borrowing on loans or the impact of equity raising, depending on the method envisaged.
 
While it is almost impossible to predict black swan events such as the current crisis, we believe companies will seek to build bigger cash buffers to weather future crises. A diversified cash management strategy is a natural defence against business uncertainty.

Optimise returns and protect investments from interest rate fluctuations