High interest rate environments have created opportunities for companies to significantly increase their treasury revenues through investable balances while reducing bank fees from bank cash balance offsets. As such, banks are pushing their clients to invest their cash balances in money market funds, but alternative investment vehicles may offer more optimal returns on investment.

The Evolving Role of Treasurers in the High Interest Rate Landscape

Treasurers have a wide range of daily responsibilities that include updating cash flow forecast, monitoring cash pooling, setting cash positioning, bank account management, and much more. As a result, the task of regularly evaluating the company’s cash investment policy can be overlooked and become a missed opportunity for companies to capitalize on the current high interest rate environment.

The traditional investments utilized by treasurers include money market accounts, short-term bonds, cash pooling, interest bearing accounts, and leveraging excess operating cash balances for Earnings Credit Rates. That said, treasury departments have a chance to be viewed as profit centers within their organizations.

With the recent Fed Fund Rate increases, meant to reduce inflation, companies can invest their cash balances to offset bank fees, generate interest revenue, and increase cashflow. Banks are motivated to attract and retain cash balances from companies to offset their internal liquidity ratios; therefore, their interest rate offerings are increasingly aggressive.

The first step in this process is to evaluate the cash on hand that is available to be tagged as excess operating cash flow or investable balances. Additionally, researching any restrictions placed on excess cash on hand is required.

Optimizing Excess Cash Flow

Excess operating cash flow is the cash on hand in the operating DDA that is leftover after a company’s outgoing liabilities and payments are met. Treasurers should pay close attention to this amount to ensure that there is no missed opportunity for long-term investment with a higher yield. In addition, these balances can be utilized with the bank’s offered earnings credit allowance, which offsets monthly cash management fees by assigning an earnings credit rate (ECR), which typically follows the fed funds rate or low risk government bonds.

Contingent on the balances kept in the operating DDA, the awarded earnings credit allowance is applied against monthly cash management bank fees and works to reduce your overall annual bank fees. Earnings credits are tax exempt and not considered income. Additionally, they are applied monthly based on the available balance, and expire at the end of month, if any excess credits remain. This option requires a delicate balancing act of maintaining a threshold, or peg balance, to fully take advantage of the earnings credit rate offered and maximize your offset of cash management bank fees.

Strategic Allocation of Investable Funds

Investable balances are balances that do not need to remain in the operating DDA and can instead be placed in an investment opportunity for short-term gains. These balances may include capital contributions, managed account balances, or surplus operating cash. Identifying the investment opportunity for investable balances should be revisited quarterly, if not monthly, in the current interest rate environment.

Investable balances are usually placed in an interest-bearing account that generates taxable interest revenues. This investment strategy presents a lucrative opportunity for organizations that hold high investable balances, as the amount of revenue generated from these accounts can cover the tax implication and cash management fees assessed by banks, while also further enhancing the company’s on-hand liquidity.

During the 2018 and 2020 recessions, the most common investment vehicle banks offered to treasurers for investable balances was a money market account or short-term bond (with one or three-month terms). Of course, the low interest rate options at that time required minimal maintenance and intervention by corporate treasurers and their departments. Specifically, the climate ensured that a small amount of interest revenue could be obtained to offset bank fees, as the earnings credit rates were under 15bps.

Rethinking Investment Strategies in the Current Economic Climate

Today, considering the current high-interest rate environment, does it make sense for treasurers to select money market accounts over other interest-bearing solutions offered by banks? It is important that companies consider whether the investment strategies of the past are currently the best investment strategies for the success of the company today.

With the help of their cash management partners, companies may find opportunities to capitalize on amending their treasury investment policy by researching other investment vehicles that yield higher returns than money market accounts.

Traditional interest-bearing accounts, for example, offer highly competitive hard interest rates. Interest bearing account rates tend to have a direct relationship to the current fed funds rate and are parallel with the changes made. Another beneficial option, especially in international regions, could be a cash pooling setup. In this case, interest revenues are generated daily either by a traditional sweep each night or a notional pooling setup.

The Redbridge Solution: Tailoring Investment Strategies for Optimal Treasury Performance

Considering today’s high interest rate environment, treasury teams may be pondering the following questions:

  • Which type of investment vehicle is best for my organization?
  • How do we select and re-write our investment policy to produce cash flow for the company with confidence?

Redbridge has a wealth of solutions that can aid you in this decision-making process. As leaders in banking and cash management negotiations, we have solid partnerships with banks that give us insights into how to prescribe the best investment solutions to corporations.

Our experienced team of global advisors work to analyze your current investment strategy and cash balances, and recommend several different scenarios to reduce your cash management costs and generate interest revenues.

The volatility of the world economy over the last 5 years has shown that we must remain vigilant with identifying new means of cash flow forecasting, protection, and planning. Treasurers must stay abreast of all investment opportunities available and being offered by their banking partners.

It is prime time for treasury departments to generate revenue and be seen as a profit center. Learn more about how you can partner with Redbridge today and capitalize on the current interest rate environment:

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