Best Practices for Optimal Cash Management
by Jim Fuell, Managing Director, Head of Global Liquidity for EMEA, J.P. Morgan Asset Management
In a world where markets are constantly changing, a well-structured investment policy can help treasurers achieve their corporate investment goals. But just as the investment landscape can swiftly change so too can corporate cash objectives. That is why it is important for organisations to establish an investment policy that clearly states their objectives and permissible investments, while also promoting long-term discipline in establishing investment goals.
In this article, we go step by step through an approach that treasurers can use to help make their surplus cash more effective, including an overview of the various investment options available for cash.
Defining an effective liquidity strategy
Effective liquidity management can increase cash efficiency by extracting the maximum value from cash resources and optimising working capital performance. The liquidity management process starts with a well-stated investment policy, which provides the guidelines that treasurers can follow to maximise their cash returns.
As shown in Figure 1, the process starts by determining if companies have a robust and accurate cash flow forecasting process in place. The precise details of a forecast will depend on how much visibility a business has on its cash flows, for example, when and where surplus cash is in the organisation, how much of it is available and for how long.
It is important to get this forecasting process right. If an organisation underestimates the level of surplus cash, it could miss out on potential investment returns. However, if the level of surplus cash is overestimated, treasurers may run into liquidity problems and be forced to pull money from investments on short notice, which could result in penalties or capital losses.