Keys to Optimizing Liquidity & Cash Management

With an increasingly unpredictable business environment, it’s more critical than ever from a liquidity standpoint to have a thoughtful approach for managing your organization’s working capital. M&T Bank can help you assess your cash needs and formulate a strategy that is designed to maximize returns on capital as it makes its way through the cash conversion cycle.

When implementing a liquidity strategy, there are several factors to consider such as segmentation of cash, current market conditions, and the projected rate environment along with the organization’s forecast for expected future liquidity events.

Segmentation of cash

With an accurate cash forecast in place, organizations can look to segment their cash to reflect the company’s distinct needs and risk profiles.

• Operating: Cash needed for day-to-day operations such as payroll, AP, etc. This is typically maintained in bank deposit solutions that provide same-day liquidity
• Reserve: Cash needed for known near-term liquidity events such as tax payments or debt service. The investment horizon is generally 3–12 months and allows you to take advantage of the markets projections of the evolving rate environment.
• Strategic: Cash not historically needed for organizational operating needs. This investment strategy focuses on total return rather than liquidity, allowing for added risk through expanded asset classes with the potential benefit of greater overall long-term returns.

Understanding current market conditions

Assessing current market conditions is crucial for informed cash investment decisions as it enables investors to understand potential risks and returns associated with different investment options and align strategies accordingly. This is a vital step for organizations seeking to make informed decisions, manage risk, and optimize their returns. It provides additional insight for choosing appropriate investments, adjusting cash segmentation allocation, and optimizing returns during various interest rate cycles. Key market indicators to examine should include interest rates, inflation, employment, and GDP growth, as well as global events and geopolitical risks that can impact market sentiment and the direction of Fed interest rate policy.

Rate environment

The slope of the yield curve provides valuable insights into market expectations for future economic growth and interest rates. A steeper slope (higher yields on longer-term bonds) often suggests strong economic growth and potential inflation, while a flatter or inverted slope (lower yields on longer-term bonds or a possible precursor to negative yields) can indicate slowing growth or even recession. Organizations that can segment their working capital into various buckets (daily operating cash vs. reserve cash), can more effectively position their cash portfolios to take advantage of future rate hikes, and/or hedge against potential rate cuts as the market continually evolves.

Let's have a conversation.

It’s important to discuss the current challenges and considerations described above, in addition to other critical questions unique to your company, such as:

• How might the evolving rate environment impact your cash flow?
• What is the personality of your cash—is it used to fund operational expenses, make payroll, fund tax payments, etc.—and why does it matter?
• What are your company’s risk tolerance and investment policy requirements?

Explore how our insights can drive strategic planning toward increased business growth. As your trusted partner, M&T Bank will have your back through every interest rate, economic, or market cycle. Our approach is deeply rooted in risk management, and we understand the importance of cash optimization to your business’s financial health and success.

Visit liquidity management to learn more.