Treasuring Stability: Managing Corporate Cash in an Uncertain Economy
Preserving cash, capitalizing on opportunities, and remaining flexible are key moves for any finance team during uncertain times. Here, six finance experts share added advice for managing treasuries today.
By Teri Saylor | Winter 2023
At its core, effective treasury management plays an instrumental role within a company’s strategic plan, helping drive decisions across all financial areas, including capital planning, internal budgeting, overall growth planning, risk management, and relationships with customers and suppliers.
Of course, instability and uncertainty in the financial sector—whether due to stubborn inflation, rising interest rates, threats of a looming recession, global conflicts, lingering pandemic impacts, or other factors—have challenged traditional treasury management tactics in recent years.
Fortunately, companies are finding ways to adjust. In fact, recent studies suggest chief financial officers (CFOs) and chief executive officers (CEOs) in the United States are slowly becoming more optimistic about the economy again.
According to the AICPA & CIMA 3Q 2023 Business and Industry Economic Outlook Survey, 29% of respondents, including corporate decision makers, are optimistic about the economy, up from 14% in Q2. Further, 45% reported they’re optimistic about their own organizations. Additionally, respondents reported making higher projections for revenue and profits in the year ahead.
Yet, despite these positive responses, organizations of all sizes remain wary of the impacts of high inflation and interest rates, along with the state of the workforce (39% of survey respondents reported the need for additional employees).
As such, corporate finance leaders are turning to shrewd treasury management strategies to weather the current economic environment and be positioned to quickly react to opportunities that arise, like a strategic acquisition or purchasing incentive from a supplier.
“A properly managed treasury strategy should create flexibility to manage through various fluctuations in the economy,” says Anthony J. Gattuso, senior vice president and director of commercial banking at BMO Commercial Bank. “Regularly reviewing your treasury management goals—including with key partners—can help you tailor your strategy and stay on track in your efforts to moderate risk and improve predictability of your cash cycle.”
For Carla Tolomeo, assistant vice president at BMO Commercial Bank, treasury management today is about remaining nimble: “Companies that are nimble will fare better than those that are cumbersome and slow to take action.”
Double Down on Debt
For watchful companies, accelerating debt repayment has paved a pathway to stability.
Frank Cesario, CEO and director at Yunhong Green CTI Ltd., a manufacturer of film-based products, relied on forecasting strategies to pay down his company’s debt five years ago in anticipation of rising interest rates.
“Although we had experienced interest rates near zero for an extended period of time, we knew it wouldn’t last forever,” he says. “We determined we owed too much money and went through a dedicated process to bring that down.”
Today, he says his company’s debt load is about a quarter of what it used to be.
“Imagine how much more exposed we’d be to the recent rise in interest rates if we still had that debt load,” he notes.
Point being, as borrowing costs have climbed to highs not seen for decades, Cesario urges corporate finance leaders to be mindful of eliminating costly, and possibly crippling, debt as soon as possible. That could be done through a variety of strategies, whether through accelerated payments, raising capital, refinancing, or other moves relevant to the company’s financial position.
Notably, many experts agree that paying down debt to free up cash is key to enabling companies to remain flexible now.
Remember Cash Is King
“Cash is king, and cash flow is the lifeblood of any business,” Gattuso stresses. “An effective treasury management strategy can help unlock working capital capacity, reduce reliance on debt and exposure to related borrowing costs, and create flexibilities to manage through down cycles.”
Generally, for businesses in a well-capitalized cash position, Gattuso suggests balancing strategy around operating cash, reserve cash, and strategic cash that’s forward looking.
“In an environment with a relatively flat or inverted yield curve, businesses are largely keeping excess cash in short-term bank products, such as liquid money market accounts, which are producing attractive returns while maintaining more immediate access to cash,” he says.
Cesario advises taking an aggressive approach to maintaining liquidity for practical needs, like funding operational expenses (e.g., payroll, mortgages, and rent).
“You can only survive on borrowed funds for so long,” he stresses. “While debt can be a strategy for lengthening the runway to achieve
success, don’t assume you can keep borrowing indefinitely—I’m not aware of any business model that can make that work.”
However, managing working capital comes with its own risks, says Derek Sasveld, CFA, director of investment strategy and research at Busey Wealth Management, who advises finance executives to closely watch interest rates. He predicts the Fed may stop raising lending rates, which could begin lowering short-term investment rates in the early part of 2024.
“If you’ve become accustomed to earning 5.5% on your money market accounts, prepare for lower interest rates in 2024 and 2025,” Sasveld cautions. “To protect against that to some extent, maybe consider going out a little longer in terms of the maturity of the investment products you buy.”
Additionally, Sasveld urges caution when balancing the need for liquidity against the desire to earn the highest interest rates available.
“Weigh the return on investment when considering your cash management strategy. Working capital is supposed to be conservatively invested,” he says. “It’s one thing to paint around the edges to earn a little extra yield if you want to take some risk to do that. But if you're managing corporate cash for working capital, you need to play it safe and build in protections against potential negative market fluctuations.”
Seek Strategic Opportunities
In today’s fast-paced and fickle financial markets, even small fluctuations can make a significant impact on an organization’s bottom line. Implementing a robust treasury risk management framework that enables CFOs to assess and manage threats associated with cash and investments, such as interest rate changes, currency fluctuations, and other market factors that impact a company’s financial position, is essential to ensuring long-term stability and staying poised to seize opportunities that come along.
“Companies should always be thinking about how to best position themselves to manage risk and take advantage of opportunities,” Gattuso says. “For the first time in many years, businesses have an opportunity to think more strategically about how they deploy their excess liquidity given the currently more rewarding interest rate environment.”
Peter Moirano, director of liquidity sales at BMO Commercial Bank, believes economic cycle changes create an environment ripe for opportunities. Currently, he’s seeing activity in the mergers and acquisitions market from corporations that have held cash in their strategic reserves earmarked for taking advantage of the changes in the current economic cycle.
“Companies that haven’t been well-managed during stressful times create opportunities for stronger corporations to acquire them,” Moirano says. “Those that have liquidity and are well-positioned to take advantage of these opportunities will benefit in the long term.”
Other disruptions, like supply chain backups, have also created opportunities for corporate leaders to strategically capture inventory.
“When there’s stress in the supply chain system, there’s a tendency for companies to try to overorder and for suppliers to try to overproduce. When things normalize, that buyer or producer may need to unload the excess inventory they’ve stored up, setting up great buying opportunities for other companies with liquidity that can take advantage of the situation,” Moirano says. “Simply, liquidity enables companies to be flexible, pivot, and move quickly.”
Listen to Learn
For Robert Chan, treasurer at Underwriter Laboratories LLC, having a strong foundation in treasury management is key to mitigating financial risk, managing liquidity, and enabling growth.
Chan advocates for companies of all sizes to have a dedicated treasurer on board instead of relying solely on their CFO or controller for treasury management.
“Treasury management should be a core component of every business, and it’s critical to at least have somebody on board with treasury experience to listen to,” he says. “You must make sure you have strong cash management—both on the receipts and disbursement sides—and safeguard your assets to ensure your fraud protections are in place.”
For organizations not quite large enough to afford a dedicated treasurer, Moirano suggests there’s insight to be gained from tapping into your network: “Building strong relationships with customers, suppliers, and peers, and keeping open lines of communication with them, offers plenty of learning opportunities.”
“These are the people who’ll be describing the challenges they’re facing and the opportunities they’re seeing and experiencing,” he says. “Many people haven’t had to deal with the situations we’re seeing now, so coming together and sharing perspectives and insights into the market provides invaluable advice for navigating this environment.”
Teri Saylor is a Raleigh, N.C.-based writer who covers a range of topics from business to lifestyles.
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