How to Grow and Manage Cash Reserves

Cash preservation is top of mind for finance professionals as economic and geopolitical pressures persist. Respondents to a recent Association for Finance Professionals (AFP) liquidity survey ranked “safety” as the most important objective in their cash investment policies (63%).1 Cash investment policies establish guidelines for corporate investors and treasury professionals. Adopting a strategy that reduces cash management risks ensures working capital for business operations.

Bank deposits and other traditional savings methods provide readily accessible cash.

In times of economic uncertainty, maintaining cash reserves increases stability without the need to borrow. Setting aside a certain percentage of profits provides a financial cushion for unexpected expenses. During the pandemic, many businesses chose to keep their short-term investments in bank deposits. Health fears have eased but bank deposits are still a popular choice for short-term business investment among 92% of survey respondents who develop policies for their organizations. Other financial products they included in the plan are Treasury bills (83%) and money market funds (76%), commercial paper (63%) and agency securities (49%).2

Most survey participants (43%) view short-term investments in bank deposits as the most stable option. Government/Treasury money market mutual funds (18%) are the next most popular choice.3 However, their selection of short-term investments is diverse, including Treasury bills (9%), prime/diversified money market mutual funds (5%), agency securities (4%), commercial paper (3%), municipal securities (2%), and more – all at much lower percentages.4

Respondents are less concerned about yields than having adequate cash on hand.

Overall, surveyed treasury professionals felt most secure investing with banks. These financial institutions have long been trusted sources for managing financial assets and planning – for both consumers and businesses. As businesses seek to protect working capital, choosing the right banking partner is critical. How do companies choose a bank?

Survey respondents cited “overall relationship with the bank” as the most significant determining factor. Other desirable characteristics include credit quality (73%), compelling deposit rates (53%) and simplicity of working with the bank (48%).5 The desire for a collaborative “relationship” with “simplicity” underscores the importance of trust in business investing.

Implement additional strategies to preserve cash or increase liquidity.

Bank deposits are excellent short-term investments. But there are other steps businesses can take to shore up cash. A powerful strategy is to unlock cash in three specific areas: payables, receivables, and liquidity management. Streamlining processes, improving controls, and managing risks in these areas is effective working capital management that can deliver satisfying results.

• Control payables to increase cash on hand.

  Carefully managing and monitoring budgets ensures you have cash when you need it. Here’s what you can do.
  
  
  1. Execute credit and collection policies that segregate duties for accounts payable and accounts receivable. Tightening controls reduces fraud and other risks.
  2. Establish a payment strategy. You don’t have to pay all your suppliers in the same way. An appropriate mix of payment types — card, ACH, wire, and checks — can extend your days payable outstanding (DPO).
  3. Schedule payments to take advantage of discounts. Some companies make payments before vendors require them. Cash paid out earlier than necessary could be used for more pressing needs. But if you can receive discounts for early payments, you should. If not, taking a few more days to pay your bills — and timing payments with your collection cycle — can keep cash in the coffers longer.
  4. Simplify payables processing to eliminate errors and waste. This may sound like common sense, but many businesses still haven’t automated invoice processing. Technology costs and downtimes are usually behind the hesitancy. However, business leaders should weigh implementation costs against potential savings and productivity gains. Full-time employees in AP departments with end-to-end automation and consistent workflows process twice as many invoices as peers without these tools.6 How do the costs compare? The departments without automation and standardized workflow pay four times more per invoice — $6.30 versus $1.45.6
  5. Get the best commercial checking account for your business. The goal is to minimize fees, while still having the flexibility to make bank deposits, transfers, and payments when you want. Comprehensive reporting and analytics are also important tools to help manage cash and track liquidity.

• Balance receivables for better cash flow.

  For many businesses, timing and collection are the biggest challenges in working capital management. Shortening your payment cycle brings cash in the door faster. In addition, an agile receivables strategy blends discounts, volume negotiation and payment terms for increased liquidity.
  
  
  1. Develop a billing and collection plan that staggers receivables. This will help to reduce gaps in cashflow.
  2. Be strategic when offering discounts and set appropriate terms for different customers based on volume, value, and payment history.
  3. Consider invoice factoring (selling your unpaid accounts receivable to another company) as a short-term cash solution.

Plan for long-term capital needs too.

While building cash reserves for short-term essentials may be your focus for now, you still must prepare for long-term capital needs.

Experts anticipate businesses will invest $130 trillion in capital projects by 2027, with significant funding for initiatives that will include corporate environmental, social and governance goals. Historical single project-based investment approaches are no longer sufficient for developments of such complexity and extended periods of time.7

Typically, companies reinvest profits, sell shares or issue bonds, take bank loans, or look to venture capitalists or angel investors for long-term capital needs. The industry you’re in and, of course, economic conditions (e.g., inflation, interest rates, credit requirements, etc.) will factor into your decision about which option is best for you. Keep abreast of industry trends and financial benchmarks so you can make informed choices.

Whether you want to grow cash reserves or secure working capital for future needs, we can help. Simply complete a short form and a Synovus Treasury & Payment Solutions Consultant will contact you with more details. You can also stop by one of our local branches.