Optimising cash for corporate treasurers

Optimised cash management

Corporate treasury functions play a critical role within any organisation, enabling businesses to meet their financial obligations and fund strategies that generate value for all stakeholders.

Since the global financial crisis, treasury functions have become increasingly dynamic. Their core areas of focus — managing liquidity, volatility and risk — have become more complex. Companies face numerous challenges, including changes in the banking and funding landscape, a shifting regulatory framework and a ‘lower for longer’ interest rate environment.

The global pandemic has further emphasised the importance of effective strategies for cash management, operational funding and risk assessment – all in a setting characterised by speed and urgency. The pandemic has also accelerated the move towards digitisation in treasury, driven by a need to provide real-time transparency into cashflows while eliminating long-standing inefficiencies and manual processes.

Corporate treasurers are rising to the challenge. They have become progressively more sophisticated and implemented strategies to better use valuable resources. Liquidity management is no exception.

Segmenting cash needs: Viewing cash as a multi-dimensional asset

The first step to cash optimisation is gaining visibility into short-, medium- and long-term liquidity requirements, as determined by the firm’s future cash generation and absorption. The goal is to identify and categorise each cash need, and then allocate to investment strategies with correspondingly appropriate risk-return characteristics.

Thanks to greater visibility into cashflows and more accurate forecasts, companies are better equipped than ever to segment their liquidity needs. For example, a company may find that a large capital expenditure is slated to be paid in 12 months’ time or cash will be needed to close an M&A transaction. These needs have a slightly longer time horizon than cash earmarked to support payable ledgers. To achieve better optimisation, the business could allocate the longer-horizon cash to enhanced liquidity strategies designed to incrementally increase risk-return boundaries.

Figure 1: Segmenting your cash needs

For illustrative purposes only. Source: Aviva Investors, August 2021

Each company will naturally have differing needs for liquidity, determined by their unique mix of business lines and target levels of liquidity buffers, as well as their actual and forecasted cash positions. Once the needs have been analysed and segmented, an investment manager can help match the different cash segments with the most appropriate investments and direct the investment process to manage and meet all cash requirements and return objectives holistically. This can be most efficiently achieved via a segregated mandate.

Figure 2: Selecting the right investment manager

Due diligence

Given the large diversity of funds and managers running liquidity strategies, due diligence is essential.

Manager expertise

Managers with expertise across short-, medium- and longer-term cash investing can allocate across a continuum of investments, as well as potentially enhance yield opportunities and deliver required levels of liquidity.

Evaluation

We think companies should not just evaluate fund manager expertise across all investment horizons and risk dimensions, but also the robustness of its investment process, risk management and credit capabilities.

Track record

In general, we believe firms can benefit from partnering with investment managers with a track record of delivering a comprehensive range of cash solutions to companies. Familiarity with the complex nature of today’s treasury functions and their associated array of liquidity needs is an essential ingredient for a fruitful partnership.

Source: Aviva Investors, August 2021

Bespoke mandates

Corporate treasury teams are fast discovering that bespoke, segregated mandates are ideal vehicles for cash optimisation. Cashflow and liquidity needs vary – those seeking a customised experience and full control over investment parameters may find significant benefits from a segregated mandate.

Segregated mandates enable companies to take a proactive approach to liquidity, tailored to satisfy the varying cash needs of each business line and readily adaptable to changes in circumstances. These key advantages are made possible by the flexible nature of the vehicle: clients have direct ownership of the underlying investments and full control over the investment guidelines, allowing them to create a finely tuned risk-return profile. This differs from a commingled vehicle, where clients own shares of the fund.

Companies can partner with investment managers with experienced, well-resourced ESG teams to create bespoke portfolios designed to meet a range of goals and principles. A broad spectrum of ESG considerations can be addressed within a segregated mandate, including climate strategies, such as decarbonisation and net-zero targets, as well as emerging areas of focus, such as biodiversity and supply chain transparency.

Together with a passionate investment manager that is committed to truly making an impact, firms can build sustainable portfolios with the power to catalyse change through the underlying investments as well as through their own corporate engagement policies.

Within a bespoke mandate, companies can set limits on concentration risk, particularly with the banks in which the firm maintains its deposits or geographies where the business is heavily exposed. A custom-built approach can also offer the flexibility to concurrently adhere to other limitations, including duration or spread risk and rating constraints. Such adherence to multiple, specific parameters is often not achievable with a pooled fund approach.

Figure 3: Bespoke cash optimisation

For illustrative purposes only. Source: Aviva Investors, August 2021