Facing 2025 Cash and Liquidity Headwinds

At the beginning of 2024, the interest rate had risen to 5.4%, the highest it’s been since 2002.1 The Fed has since reversed course, lowering rates three times in 2024 – September 18, November 7 and December 18. More reductions may follow in 2025.2

Corporations typically earn less on cash in savings and money market accounts when interest rates dip. However, future rate reductions and a new administration could bode well for growth and expansion.

“We’re looking ahead to what could be a friendlier corporate and commercial environment for buying, building and expanding businesses. As executives feel confident about the future economically and are willing to spend more, we’ll likely see increased lending and more open capital markets,” says David Neely, managing director, Synovus Deposit & Liquidity Solutions. “Because borrowing will be less expensive, it follows that mergers and acquisitions will pick up and capital investment will increase, which may push companies to be more attentive to how they manage cash.”

And what about inflation? While it’s fallen to 2.9% ― far below a 9.1% peak in the summer of 2022 ― it’s still above the Fed’s target of 2%.3 “Looking forward, inflation will be impacted by proposed tariffs and the supply chain,” explained Tom Loffredio, managing director, Synovus Capital Markets. “If companies are paying more for goods, they’ll need cash to do so. This will reflect how businesses manage their corporate liquidity planning into 2025 and beyond.”

Three strategies will prepare corporations to take advantage of cash and liquidity opportunities.

Now, everything costs more ― from inputs to labor. It’s been the ongoing post-pandemic state. “Inflation is down, employment is steady, and the economy is doing well,” notes Neely, “but there’s still a fair amount of uncertainty about 2025 and beyond.”

Loffredio concurs. “In the past few years, corporations managed uncertainty with more cash and short-term investments to capture the higher interest rates while still managing risk,” he says. “Now liquidity planning will have to accommodate lower interest rates and potentially higher prices due to tariffs.”

From Neely and Loffredio’s perspective, these headwinds offer opportunities to rethink liquidity management strategies. They recommend three strategies to manage risk as well as return.

1. Establish and follow an investment policy statement.

   An investment policy statement (IPS) defines a corporation’s risk appetite and values and enables goal setting and strategies that align. An IPS is unique to each organization and ensures that assets are available to meet cash flow planning requirements and operational needs.

   “Better risk management, transparency, and consistency in making investment decisions are among the benefits of an IPS,” Neely explains. “The document demonstrates the company’s commitment to principled investing that meets regulatory requirements.”

   An IPS should cover asset allocation, investment selection, monitoring and reporting — the more detailed, the better.

   • Asset allocation diversifies investments to minimize concentration risks and enhances liquidity.
   • Investment selection focuses on credit quality, maturity profile, liquidity characteristics and yield.
   • Monitoring and reporting ensure investment performance and liquidity positions align with IPS guidelines.

2. Evaluate both short- and long-term capital needs.

   Frequent cash flow planning reviews and updates are musts for companies of all sizes in all industries. “We encourage clients to engage in cash flow forecasting for both the short and long term,” Neely says. “Ideally, you want to look at not just the next three to six months, but also the next two to three years.”

   The key is to assess the capital available now and whether there will be adequate access to capital in the future. This exercise helps executives set clear goals; make informed projections for capital expenditures, mergers and acquisitions; maximize return on assets; and accommodate unexpected dips and upswings.

   “Cash forecasting shouldn’t be done just once a year. You should evaluate cash flow on a quarterly, even monthly basis, given how quickly technology and markets change,” Neely cautions.

3. Create a plan to manage risk and return.

   A liquidity plan serves as a roadmap to guide investments according to when capital will be needed. The plan should include assets for primary and secondary liquidity.

    Primary liquidity assets include cash and equivalents used for operating costs, plus short-term investments that mature in less than 90 days. “Recently, cash was earning a decent return so keeping cash was a good option. But as rates drop, companies will want to consider the highest yield options and balance them with risk and liquidity needs,” says Loffredio.

    Secondary liquidity assets are harder to convert to cash but can be sold to raise capital. These include equipment, inventory and facilities. Long-term CDs, agency, Treasury, and ultra-short bond funds are additional sources of secondary liquidity and income.

When planning for liquidity, be flexible.

As we learned in recent years, nothing is certain. Says Neely, “It’s been four years since a recession. And while a significant economic slowdown doesn’t appear imminent, conventional wisdom suggests what goes up must come down, even if only a bit.”

It’s wise to expect industry, location or market fluctuations. If a correction does occur, a sound, yet flexible liquidity plan will help lessen the impact to operations and profitability. 

Stay informed of factors that can affect liquidity planning.

When you have questions about the evolving financial landscape and how it could affect your organization’s cash flow planning and liquidity, look to trusted advisors who can offer the expertise and resources needed.

“You can only control so much, especially when the economy and geopolitical environment are rapidly changing,” says Loffredio. “That’s why experience and collaboration are critical when making cash management and liquidity decisions. Open communication with advisors about your organization’s future plans ensures everyone has the same playbook and can factor in potential future impacts.”

Neely agrees. “Our clients have weathered many ups and downs in the past few years,” he says. “As bankers, our goal is to provide the insights they need to make the best possible decisions to accomplish their goals for profitability and growth.”

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