Maintaining Focus on Liquidity in Your Business

With Fed policy changes and interest rate uncertainty, liquidity management is critical.

image of restaurant business owner

If you can't pay the bills, you're out of business. Paying the bills may have been easier in the zero-interest-rate environment that persisted until December 2015. Any errors in managing liquidity tended to have a lower price tag, since the cost of borrowing or liquidating an investment to cover cash outflows was generally less severe.

As a result, precise and efficient liquidity management was less urgent for some companies. Has liquidity management atrophied to some extent at your organization? If so, it's time to dust off this skill set as Fed policy evolves. Amid change and unknowns, liquidity optimization becomes essential.

Managing the balance sheet to avert liquidity risks
A combination of liquid assets and access to credit can help ensure short- to medium-term funding. Managing liquidity includes understanding and mitigating potential balance sheet exposures.

Assets
Short-term investments serve as a tool for earning a return while allowing quick retrieval of liquidity. If you have liquid assets such as bank deposits, money market funds, and direct instruments, consider these points:

  • Duration. Does the span of an investment restrict access to the cash? Know the penalty for early withdrawal.
  • Quality. Rate increases can affect an investment's underlying credit rating. When rate changes occur, make sure your instruments still comply with your investment policy.
  • Objectives. Think about how best to balance investment and policy objectives, such as capital preservation and yield, to ensure they align.

Be sure to monitor market rates and keep abreast of new bank deposit products that may become available. Some companies prefer to tap bank investment services, such as separately managed accounts, as a liquidity management tool. Regardless of approach, it's important to stay informed of regulatory change and impacts.

Liabilities
Common risks amid rising interest rates include:

  • Access. Can you get hold of credit when needed?
  • Cost. Credit may be available, but only at a higher rate than desirable.
  • Interest rate risk.  Corporate treasurers must assess and manage the potential adverse effect of floating-rate debt.

One way to address concerns about access to credit is to hold more precautionary cash. Many firms employed this strategy during the financial crisis. There may be an opportunity to consolidate your banks as a way to increase the credit appetite among your primary banking relationships. This is especially the case as banks see operating deposits and related business as a result of Basel III.

Hone your skills
An evolving interest rate environment is an ideal time to hone your liquidity management skills. A good place to start is the balance sheet. Assess the risks to assets and liabilities as well as the responses at your disposal for managing them.

This article also appears on Wells Fargo Treasury Insights, which shares information on cash positioning and forecasting, fraud protection, managing payments, and more.

Anthony Carfang is Managing Director, Treasury Strategies — a Division of Novantas, Inc.

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Information and views provided through Wells Fargo Treasury Insights are general in nature for your consideration and are not legal, tax, or investment advice. Wells Fargo makes no warranties as to the accuracy or completeness of information; does not endorse any non-Wells Fargo companies, products, or services described here; and takes no liability for your use of this information. Please contact your own legal, tax, or financial advisors regarding your specific business needs before taking any action based upon this information.

This information is provided for educational and illustrative purposes only.

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