We wrote an article with the same title in 2018. The focus was different with 0 to negative interest rates but the conclusion might be the same. Time to re-write this and publish a 2.0 version of Is Cash still King ?
All treasurers and most financials know the statement “cash is king.” The name speaks for itself so accurately that there is no need for explanation.In any company, cash should be superior to all other forms of (accounting) income. Having available cash on hand provides immediate opportunities to exploit (dividends, M&A). Still not convinced? Just remember — cash has one magical power: it pays the bills.
Active cash management
Any worthy resource comes at its price, and so cash comes with financial implications. Thus, a treasurer needs to know where and in what position all the cash is. We all agree that ignorance is never a particularly productive trait…. With cash, doing nothing can lead to very unfortunate consequences, oppotunity costs of idle cash. Hence, it is only logical to explore the ways to reduce the cash level. Hold on….before you treat yourself to the finance department’s version of Prada shoes (yes, I’m looking at that six-figure forecasting software), remember: it doesn’t necessarily mean spending the money.
Several options include:
- Compensating cash deficits with surpluses, also between different currencies (fx swaps)
- Repaying (short term) loans
- Paying dividends
- Paying suppliers earlier to receive a discount
- Invest
Of course, the above options are examples and depend on the specific company. Nevertheless, here’s one very important aspect that all of these actions share: a cash flow forecast. Cash-related decisions taken now have an inevitable impact on your future cash position. As a result, the actions you are taking have to be advantageous in the present in addition to being beneficial in the future.
But don’t worry, you don’t have to make this decision alone! Simulations and forecasting software is there to help. For example, a simulation on your credit lines, changing interest rates, and changing payment terms can be very interesting.
Floors and terms
If you have been with your bank for a long time, there is probably nothing formally agreed upon about the current interest rate conditions on your cash. This allows you to negotiate with the bank on your terms for holding cash.
Some possibilities I have experienced with my clients:
- Floors / caps in the interest rates
- Thresholds: for example, the first 10 million at a preferred rate
- Combinations of the above
- Spread between credit and debit amounts; a lower spread is often better
Invest
Another option to manage large cash balances is to invest the money. This is a sensible topic as most treasurers are risk-averse; they won’t even cross the street without a cash flow forecast and a contingency plan. The more the return expected, the higher the risk associated with the investment. Cash at a bank is considered fairly safe (given that the cash is divided over several banks with a good credit rating, and depending on the amounts). Furthermore, the liquidity of the investment is important. Cash is readily available. If you invest the money, it first has to be exchanged or transferred to cash, which can take time or impact the return. Most treasurers are prudent on investments, and/or internal rules do not allow them. But there is trade off between risk and return. There might be better rates out there with the same counterparty risk, or even better. And these parties do not neccesarily have to banks. It would not be the first time Pecunia finds excess returns for clients while keeping risk the same or even reducing it. Free money!!
Cash is still king
Overall, looking at the above, cash is still king. For every company, it is better to have cash than to be short on cash. However, having too much cash can hurt a company, too, as the return on cash balances is very low. A treasurer has always been essential — but now more than ever, their value is sky-high. They are your go-to for knowing where the cash is and how to make it work harder.No one in your company watching the cash pile? Bold move. Might be time to assign someone before it quietly shrinks itself. Spoiler: that person usually pays for themselves.
Can’t afford a full-time treasury guru? No problem — rent one. An external treasurer gives you brains, spreadsheets, and peace of mind. No onboarding headache required. Contact us for a free brainstorm session.
