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Principles of Cash Management

Ben Verschuere

Large corporations don’t let their cash sit idly in their bank accounts, instead they use their cash as an asset and a revenue generator. In order to achieve this, they have a treasury team dedicated to optimizing their cash by redeploying it into corporate bonds and fixed income securities.

Much like those big corporations, Treasure enables SMBs to derive returns from their idle cash. Below, we share five time-tested principles to guide businesses toward optimizing their idle cash management.

1) Master your cash flow

Before you begin redeploying your business cash reserves you should first have a deep understanding of your cash flow profile and cycle. Next, you should have a clear overview of your finances in real-time in order to make any necessary adjustments. This solid grasp of your financial picture is important as it helps optimize the idle cash asset allocation, and thus, the returns generated.

2) Asset selection matters

Cash management isn't one size fits all. Returns on fixed income securities can vary widely. For example, in 2020 the best performing short term bonds funds saw a return close to three times larger than the lowest performing ones. Much like Fortune 500 companies it is important to partner with a team of experts that has deep experience in fixed income markets to optimize the securities selection used for your cash management.

Data: Morningstar

3) Stay disciplined

As it is true for any investment it is important to keep a disciplined and consistent approach over time.  The biggest enemies of compounding are frequent and rash actions. Corporate bonds tend to produce positive annual returns, so the reward of such investments is realized by a commitment to the cash management strategy.

Data: Bloomberg

4) Expect some short term movements

One of the characteristics of corporate bonds and income generating securities is that they are  influenced by general movements in interest rates. For example, when rates move higher, these securities tend to underperform (although higher yields also enable investors to lock in better rates). As the Apple treasury example below shows, a portfolio of corporate bonds experiences some mean reverting unrealized profits and losses (blue) due to market fluctuations, but these are dwarfed over time by the income generated (orange). What matters is the income escalator, not the short term market gyrations.

Data: Bloomberg

5) Be diversified

As the old adage says don’t put all your eggs into one basket. A diversified approach toward cash investment has the benefit of decreasing the overall investment risk by reducing the exposure to idiosyncratic factors. Another benefit of diversification is that day-to-day variability of an investment portfolio is dampened (though as we mentioned above that volatility is not completely removed).

Conclusion

Much like a big corporation relies on a team of professionals to manage its idle cash, so should your business. The partner you chose should hold deep experience in financial markets as well as a clear and systematic understanding of your cash flow profile in order to generate tailored returns to your business. Time to make your cash perform!


Ben Verschuere (Chief Investment Officer)

Treasure Investment Management, LLC

Disclaimer: The views and opinions in this piece are just the author’s own, offered to the public at large and not to any one particular investor.

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