This is the second story in a four-part series on cash management. The first story, The Value of Cash, looks at how to value $1 of surplus balance-sheet cash. Flight Risk, the third story, explains why there may be a mass exodus of corporate cash from money-market instruments. Loosening Without Losing, the final story, explores how treasurers can prepare for a rise in interest rates.

A survey on corporate cash investment released this week by vendor SunGard showed that corporate treasurers’ greatest concern is “the lack of suitable repositories for cash.” Fewer of the same group of finance execs at 160 companies said that they need immediate access to all their cash — 33% this year, compared with 46% in 2014.

cashgraphThat fact “suggests that treasurers are starting to review and refresh their investment policies and are in a better position to manage a wider range of instruments,” said SunGard. For example, 27% of respondents were investing cash in commercial paper, up from 10% last year.

Respondents also said they have more cash to play with — the proportion of companies that have increased their cash balances grew to 49%, up from 43% in 2013. That rhymes with the results of a survey CFO conducted back in August. Of the 144 total CFOs and other finance execs responding, 90 said they are not planning any financing activity the next 12 months. The top reason? They “have sufficient cash on hand to fund operations and any growth initiatives.”

Notably, 65% of the execs surveyed by CFO worked at companies with $50 million in revenue or less. That’s a segment not often associated with abundant liquidity.

Let’s assume that a company has more cash to invest, and at longer maturities.

To do any kind of cash investing successfully, but especially when extending maturities, a company must segment its cash assets first, say the experts. Capital Advisors Group advises putting corporate cash into three categories: “daily liquidity,” “planned liquidity” and “market liquidity.”

In Capital Advisors Group’s hierarchy, daily liquidity refers to cash balances kept on hand for unanticipated fluctuations in the needs of the business, and planned liquidity refers to “seasonal needs and cash expenditures.” Market liquidity, in contrast, refers to excess cash balances “that allow more flexible strategies to maximize return potential.”

Analysis_Bug3Payments company Western Union calls its three similar buckets “liquid cash,” “core cash” and “strategic cash.” Strategic cash is long-term money, cash the company may not need for six to 12 months. “We can drive  for a longer-term investment that comes with a little bit more yield,” says CFO Raj Agrawal. “We don’t give up on the quality of the investment, but we do have the ability to play with the maturity.”

Capital Advisors group says the following investment vehicles may be appropriate for each liquidity bucket:

• Daily liquidity: Transactional bank deposits, stable-NAV (net asset value) money market funds and other pooled investments and overnight repos.

• Planned liquidity: Term deposit accounts, treasury and agency securities and high-quality corporate and financial credits.

• Market liquidity: High quality asset-backed and mortgage-backed securities “in addition to the aforementioned instruments.”

Most certainly, commercial banks and asset managers will devise new products to attract corporate cash as older options, like prime money market funds, become less appealing due to regulation. Ultra-short duration bond funds are one existing example — they have higher returns than prime money market funds, with durations of 6 to 12 months. On the down side, they also a more volatile NAV.

The one financial institution that increasingly may not want surplus corporate cash is a commercial bank. Under Basel III, banks have to maintain a certain percentage of stable, liquid funding. While companies’ operating deposits, which are tied to things like payroll, will be attractive to banks under Basel III, non-operating deposits will not be. In a financial crisis, assume the regulators, a company is likely to pull those excess cash balances.

In response to the regulation, banks are introducing what Brandon Semilof, a managing director at StoneCastle Cash Management, calls “31-day put vehicles.” These deposit products require the company to give the bank 31-days’ notice if it wants its cash back. That may not be so inviting for treasurers that need daily liquidity, but for those that can allot a portion of their cash balance to longer-maturity vehicles, it’s another option.

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