Strategies to help optimize excess liquidity
Business goals and cash needs are factors to scrutinize when establishing an effective liquidity management plan.
Whether your business is building capital or in a growth cycle, effectively managing excess liquidity is vital to a successful cash management strategy. Many solutions are available to meet short- and long-term operating and investment needs, but it's important to start with a broad view of business goals and the tools that can support them. Take advantage of savings and investment resources to help your company maximize and stabilize earnings across business cycles. How do these recurring expenses line up with typical income flows? Are there periods when you'll likely have more available cash than you need to cover your payments? Even if your cash flow is tight and you need quick access to funds regularly, there are strategies for short-return timeline requirements, including leveraging some of the below account types. These accounts provide quick access to funds, while also providing some benefits: Business expenses can be broken into four segments: operating, reserve, strategic and restricted. Except for restricted cash, which is ineligible for certain investment products and must be set aside, each segment corresponds to a period on the liquidity spectrum. Operating funds are best to invest in short-term opportunities, reserve funds can be invested in short- or mid-term opportunities, and strategic and restricted funds can be invested in mid- and long-term opportunities. Using these short-, mid- and long-term categories, you can build a custom plan that includes savings and investment accounts to optimize earnings while maintaining access to the cash you need. The goal would be to engage an integrated financial team to help distribute risk on- and off-balance sheet to ensure funds are put to the best use, while maintaining access to day-to-day capital requirements. Accordingly, options are available to accommodate various risk profiles, ranging from traditional bank depository products to complex capital markets investment options. Whether the return is higher on the banking or capital markets side is determined by market conditions and the corresponding rate environment. Not only can your banker help you choose a short-term savings model that aligns with your cash flow fluctuations, but they can also help you create a long-term approach. Building a liquidity management strategy that yields consistent returns requires a deep understanding of your business' goals, special requirements and risk appetite.