Investment Cash

For a corporate treasurer, short-term investments are a key component of liquidity management. The primary objective is the preservation of principal and immediate liquidity, with yield being a secondary consideration. This “investment cash” serves as a strategic buffer for operational needs, unexpected expenses, and opportunistic outlays, ensuring the company’s capital is both safe and readily accessible.

Core Instruments for the Corporate Treasury Toolkit

Advanced Instruments:

• Ultra-Short Bond Funds: Invest in bonds with slightly longer maturities (e.g., avg. 1 year). Offer higher yield potential but are subject to principal fluctuation (NAV not stable). Used for a small portion of the portfolio with a slightly longer time horizon.

• Separately Managed Accounts (SMAs): A customized portfolio managed to the company’s specific policy. Offers transparency and control but requires more internal oversight.

Implementing an Effective Investment Policy

A formal Short-Term Investment Policy is non-negotiable. It is approved by the Board or Audit Committee and must include:

1. Primary Objectives: Clearly state that safety of principal and liquidity precede yield.

2. Credit Quality Standards: Specify minimum allowable credit ratings (e.g., A-1/P-1 for CP, AAA for MMFs).

3. Permitted Instruments & Concentration Limits: List approved investment types (as above) and set limits per issuer, instrument type, and fund family to enforce diversification.

4. Counterparty & Vendor Due Diligence: Define criteria for selecting banks, fund providers, and managers.

5. Maturity & Duration Limits: Set maximum allowable maturity (e.g., 13 months) to manage interest rate sensitivity.

Current Considerations

• The Search for Yield: With interest rates higher than in the previous decade, treasurers can now earn meaningful returns on cash. The focus remains on not “reaching for yield” by compromising credit standards.

• ESG Integration: There is growing demand for investment options that meet Environmental, Social, and Governance (ESG) criteria, such as green money market funds or sustainability-linked commercial paper.

• Technology & Automation: Treasury Management Systems (TMS) and bank portals offer automated sweeps into designated investment vehicles, improving efficiency and ensuring cash is never idle.

In practice, managing investment cash is about disciplined execution within a strict policy framework. By leveraging a tiered approach—using bank deposits for operational cash, government MMFs and Treasuries for core reserves, and carefully venturing into prime MMFs or CP for maturity extensions—treasury secures the company’s liquidity while contributing to its financial performance.