Whether your business is building capital or in a growth cycle, effectively managing excess liquidity is vital to a successful cash management strategy. Because there are many solutions available to help your company make the best use of excess funds, it’s important to start with a broad view of business goals and the tools that best support them.
From taking advantage of savings and investment resources to helping your company maximize and stabilize earnings across business cycles, companies can leverage unused cash to maximize earnings and take a more strategic approach to short‐term needs and long‐term growth objectives.
Identify opportunities to capitalize on excess funds
The first step in an effective liquidity management plan is understanding how much cash you need on hand to cover basic operating expenses like rent, payroll, and insurance payments. How do these recurring expenses line up with typical income flows? Are there periods of time when you’ll likely have more available cash than you need to cover your payments?
By taking a closer look at cash flow patterns, you’ll be able to identify opportunities to put excess cash to work. Even if your cash flow is tight and you need quick access to excess funds on a regular basis, there are solutions and investment strategies designed to fit short-return timeline requirements. Taking a strategic approach and expanding the tool set you use to manage excess liquidity provides opportunity to increase returns while optimizing working capital.
Build a plan to suit your needs
Once you’ve examined the timing and amounts of regular payments and income streams, you can work with your banker to create a liquidity optimization plan that will work for you. Short‐term, low‐risk solutions can maximize returns while also ensuring you have access to the cash you need to cover costs as they arise.
Beyond traditional bank depository products, your cash management strategy can include short-term overnight capital markets investment options like time deposit (TD) accounts or money market funds that may offer better returns. Your banker can help you build a custom plan that includes both savings and investment accounts to optimize earnings while maintaining access to cash as needed.
Take a comprehensive view
This is one of many important elements to consider as you build a sound, comprehensive investment plan. 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 strategy. If you are in a position to use your excess business cash in service of a long-term goal, you should start with an understanding of timing. Long-term liquidity strategies can vary between three and 10 years, whereas short-term opportunities can be as quick as next-day access.
Building a liquidity management strategy that yields consistent returns requires a deep understanding of a business’ goals, special requirements and risk appetite, and should be part of an overall financial plan. Aligning a team of experts who knows your business well enough to create a custom plan, and can evolve that plan as your company grows and your needs become increasingly sophisticated, is paramount.
Finding a partner to build a strong liquidity strategy
Optimizing liquidity is a complex task, but one that can greatly enhance your business operations and cash flow. Research to find a team who understands the big-picture of your business’ cash requirements and objectives, offers a broad solution set to meet those objectives, and can partner with you to put your excess funds to best use.
Working with a financial partner that offers this expertise and capabilities can help ensure you are maximizing your excess cash, have a comprehensive financial plan and are well-positioned to effectively plan and manage your company’s business needs and goals.
Zach Fee has more than 17 years of financial industry experience and currently serves as president of regional banking at UMB Bank. He can be reached at Zach.Fee@umb.com.