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Cash Investment Policy Statements: Developing and Maintaining a Corporate Cash Management Plan

Throughout the past several years, the cash management industry has evolved into a multi-faceted and complex investment strategy. For those corporate treasurers who have not yet established a corporate cash investment policy statement (IPS) or have not recently evaluated their current IPS, now is the time to act. By establishing and maintaining a solid IPS for cash investment strategies, you will have the ability to more accurately map and track your company's cash.

What an IPS Does

The CFA Institute defines an IPS as a policy which "addresses the client's risk tolerance, return requirements, and all investment constraints...The IPS also should identify and describe the roles and responsibilities of the parties to the advisory relationship and investment process, as well as schedules for review and evaluation".

In other words, an effective IPS will act as a roadmap for the management of your corporate cash, and will enable you to communicate the goals and the allowable level of risk for your business's cash portfolio. In order to accomplish these objectives, the IPS should be specific to your company, dynamic and flexible enough to meet current market and corporate needs, reflective of total risk tolerance, and should clearly outline an ongoing review and modification process, as well as list the parties responsible for this process and decision making.

Developing an IPS

Prior to establishing an IPS, it is imperative that a complete evaluation of the business's cash needs and an assessment of its risk profile be conducted. By forecasting corporate liquidity needs and carefully considering risk tolerance, you will have the best opportunity for achieving excess returns within a cash portfolio. At this point, the appropriate staff should take inventory of corporate cash flow forecasts, and a complete assessment of the company's financial priorities. Once this has been completed, treasurers and finance staff will be better equipped to judge the makeup of the operation's cash, with regards to how much is available as operating cash, core cash, and strategic cash for investments.

Important Considerations

Although every company's IPS will be unique, there are certain factors that all corporate cash management plans must take into consideration such as:

  • Risk Tolerance - Risk comes in numerous forms, and the impact of these risks on a corporate cash portfolio can vary based upon your ability to anticipate, tolerate, and navigate them. To do this, you must decide whether your key priority is to preserve capitol or maximize returns, determine which types of risks are acceptable and to what end, asses your company's ability to weather volatility, evaluate how your business will perform during different market cycles, and determine how much diversification of investments is desired.
  • Portfolio Objectives - Once you've determined your allowable risk tolerance and liquidity needs, you can establish the objectives for your corporate cash portfolios. You may determine that your primary portfolio objective is quantitative, seeking out returns that exceed a defined market hurdle, or one that is qualitative, in which the focus is placed on safety and liquidity. Regardless, the objectives should be specific so as to guide the operation's choice of investments, while remaining flexible enough for you to take advantage of any tactical opportunities that may be presented by the cash and fixed income markets.
  • Benchmarks - To ensure that your corporate cash portfolio objectives are being met, regular and measurable benchmarks must be set and evaluated. These benchmarks should strive to compare a portfolio's makeup with regards to type of securities held, asset location, and duration as a means of effectively conveying risk.
With a solid IPS in place, you'll find that your corporate cash management strategy is far more effective.

Devising a Revenue-Accretive Alternative Investment Strategy for Corporate Cash

Holding on to adequate reserves of cash is a necessity for operating a company. The problem with it is that it dooms a large part of a company’s asset base to being unproductively saddled with low returns. Coming up with an alternative investment strategy for corporate cash can’t mitigate all of the financial drawbacks of maintaining a liquid reserve, but can ensure that businesses don't leave any potential interest income on the table.

Cash Sweep Accounts

Corporate Cash Overseas: Why is it there, and will it be returning to the States anytime soon?


With more than one trillion dollars in corporate cash and short-term investment being held overseas, it's no wonder that off-shore accounting has been a hot topic as of late. Many corporations find themselves wondering if this practice is worth looking into, and what the legalities are. In this post we will explore the reasoning behind stockpiling corporate cash overseas, its legal foundation, and its outlook.

Exotic Corporate Cash Investments Attractive in Low-Yield Environment


Institutions and endowments have used exotic or alternative investment for decades. During the last boom years, more wealthy individuals and corporations added these instruments to get more diversification and earn hefty returns. The financial crisis of 2008 propelled alternative investments into the limelight.

The Top 5 Forces Changing Treasury Cash Management

Corporate treasury cash management is changing to take a much more strategic role in the business. What was once a straightforward ledgers-and-ink position is becoming more strategic and evolving with the changing nature of business, from multinational expansions to a heavier reliance on cloud computing services. Here are five of the top drivers that will change the role of corporate treasurers.
  1. Companies want new sources of growth. Despite a sluggish economic recovery, organizations need to grow their revenues. This will shift the treasury role into a more strategic position. Some treasurers may find themselves working with financial control, human resources, investor relations, operations, and other areas of the business to find new opportunities and boost the company's cash flow.
  2. More companies are going global. Part of the strategic focus of corporate treasurers is going to include how to provide centralized, real-time treasury cash management capabilities to the rest of the decision-makers in the business, as well as integrate currencies and international platforms into one location for easy access to the business's finances.
  3. Companies need better data. Green ledgers aren't cutting it in today's world; corporate treasurers know that their companies need insight into treasury cash management across multiple locations, including international locations. As part of the more strategic focus of the corporate treasurer's role, that will include being able to predict cash flow and liquidity, as well as track existing cash.
  4. Corporate treasurers will need to rethink their relationships with commercial banks. Instead of just processing transactions, commercial banks will become more of a strategic partner to the treasury department. This will mean full visibility into accounts, even if the accounts are spread out over several banks. Commercial banks will most likely offer cloud services to do this, which will become a critical component of treasury cash management, as will better integration with existing corporate financial software.
  5. Technology will speed the treasury cash management process. Along with commercial banks providing cloud-based software that better integrates with corporate financial software packages, automation technology will streamline the cash management process. Cycle times and staffing needs will be reduced, freeing up the treasury department for more strategic initiatives - and for the meetings they'll need to have with various business departments to meet the changing requirements of their role.
For corporate treasurers, this shift in the role can lead to new opportunities to become less of a service to the organization and more of a strategist.

Corporate Cash Deployment: Conservative Investments and Liquidity Still the Name of the Game


Over the last few years, many of the largest companies in America have been keeping their large cash reserves on the sidelines due to the economic uncertainty of the modern market. Estimates place the amount of sidelined cash at anywhere from $1.5 trillion to $2.8 trillion, a considerably large sum being stockpiled due to a variety of factors, including the European debt crisis, the US recession, extremely low interest rates, severe market fluctuations, unpredictable commodity prices, and unsettled political situations in a variety of countries around the world. Of course, even with so many factors combining to influence CFOs to play it safe with their cash reserves, there is just as much incentive to deploy that money in a safe, effective way and put it to work, while maintaining the precious liquidity necessary in the unpredictable modern market. Due to all of these factors, and the general economic climate, CFOs are leaning more than ever toward conservative options for their corporate cash deployment strategies.

Reasons for the Increase in the Overall Corporate Cash Reserve

Since the horrible cash crisis of 2008, business are holding onto a significant amount of more cash. According to the Harvard Law School Forum on Corporate Governance and Financial Regulation, in 1980 firms only held 12 percent of assets in cash. But this number almost doubled by 2011, amounting to approximately 22 percent of assets being held in the corporate cash reserve. The rise in the corporate cash reserve has caused significant speculation toward the reason or reasons for this significant spike. The following information presents potential causes for why corporations are holding onto more cash than ever before in history.

There are factual macroeconomic factors that undoubtedly lead to the reasons behind the rise in the corporate cash reserve. One potential reason corporations have increased their corporate cash reserve is because capacity utilization is extremely low.  According to Forbes, during 2008 through 2009, U.S. industrial utilization plummeted from 80% to a staggering 67%, which represented the lowest it has ever been. Yet, this rate was even more dramatic for certain sectors such as the automotive sector, which suffered a 35% decline. The other reason is because of the extremely low inflation rate, which significantly lowers the opportunity cost of holding cash. For example, instead of purchasing inventory, corporations are more likely to hold the cash because the value of the inventory is much more likely to stay in tune with inflation. 

In addition to stockpiling cash, several companies are doing so outside of the United States. The top five holders of cash outside of the United States are Google, Microsoft, Apple, Cisco, and Pfizer, which account for at total of $347 billion. Factors for the rising international corporate cash reserve are deduced to the slow rate of domestic growth, the strength of international markets, and the substantial tax cost of repatriating the money. Instead of paying the gargantuan tax bill, several companies are simply allowing the money to stay overseas. According to Moody's, "Based on better overseas growth prospects and domestic cash consumption represented by dividends, share buybacks, and the majority of acquisitions we expect overseas cash balances will continue to grow unless tax laws encourage U.S. companies to repatriate money,". 

While several causes may lend to the increase in the corporate cash reserve, undoubtedly the uncertainty of the future is the primary culprit. The Harvard Law  study, "The Effect of Manager's Professional Experience on Corporate Holdings" highlights the notion that the previous experiences of managers has caused them to behave in a much more cash conservative manner. Simply put, since many CEOs have experienced major financial difficulties previously in their career, they are much more likely to stockpile loads of cash. Based on the study, "We find that CEOs who were previously employed at a firm that experienced financial difficulties have a cash-to-asset ratio that is 3.1 to 4.4 percentage points higher compared to those firms whose CEOs did not experience financial difficulties." This trend doesn't seem to be curtailing anytime soon due to the fact that firms "...may choose the CEO because she has experience running financially troubled firms..." 

Overall, corporations are holding onto more cash because of several variables. While experience is the best teacher, several CEOs can easily recall when funds were not available for their short term corporate projects. During times of financial crisis banks practically shut their lending doors, which meant forced several businesses to close their own. The only solution to sustain business is by using on-hand cash, which has always been king in the business world. 

Post-Purchase Analysis: BOLI Work Is Not Over After Pre-Purchase Vetting


Though pre-purchase analysis is of vital importance when entering into an agreement on a bank owned life insurance policy, the process of analysis does not stop there. There are many important elements that must be kept track of over the long term policy ownership period, in order to minimize risk, maximize opportunity, abide by the ever-changing legal regulations relating to BOLI, and generally protect one's investment. Many of the key points of BOLI pre-purchase analysis apply to post-purchase analysis, especially in regard to the quality of the insurance provider. The FDIC, Federal Reserve Board, IRS and Office of the Comptroller of Currency release updated information about BOLI and modified regulations of the industry regularly, so their websites are a valuable place to start when conducting BOLI post-purchase analysis. An annual review of the BOLI assets of one's institution is not just strongly recommended, either. It is a requirement to meet compliance obligations. There are many steps necessary to maintain maximum efficiency and protection with BOLI policy investments, and to meet compliance requirements.

Comprehensive Pre-Purchase Analysis: The Key to Effective Investment in BOLI


When it comes to bank owned life insurance pre-purchase analysis, a variety of US Government agencies offer some advice, and some regulations, that make for a strong starting point. The FDIC makes the general, blanket recommendation that any bank interested in purchasing and holding BOLI policies, a detailed, high-quality, well thought out risk management plan should be put into place prior to any purchase. The Office of the Comptroller of Currency details the reasons for which BOLI policies may be purchased, pursuant to 12 USC 24 – in connection to employee benefit and compensation plans, for cover of post-retirement and executive benefit packages, in connection with key person policies, and when related to insurance on borrowers and loan security.

Risk Management and Maintenance of Complex Bank Owned Life Insurance Policies


Bank owned life insurance policies have always been complex investments, and tend to grow ever more so as new regulations, risk management and maintenance strategies emerge with each passing year. Despite their complexity and typically intense regulation, BOLI policies seem only to increase in popularity by the year. As with other types of life insurance, there are both whole and universal life options for BOLI policies. According to the Office of the Comptroller of Currency, a national bank may buy and hold specific types of BOLI based on 12 USC 24. BOLI policies can be purchased when connected with compensation and benefits plans for employees, insurance covering post-retirement benefits, key person insurance, insurance taken out on borrowers and insurance for loan security. In addition, the OCC has the right to approve other uses on a case-by-case basis. With the basic reasons for purchasing BOLI out of the way, it is important to look at the best practices for risk management and long-term maintenance of the policies.

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