Maximizing Operating Cash in a Tepid Interest Rate Environment

Maximizing Operating Cash in a Tepid Interest Rate Environment


Treasury Strategies for Maximizing Operating Cash

If watercoolers were still the rage, today’s big watercooler topic at many corporates would be speculation about what will happen with interest rates in the U.S. After years of historically low interest rates, the Federal Reserve recently raised rates for the first time in nearly a decade. The question on everyone’s minds is – will they be moving higher and if so, when? A great many analysts predict they will remain low for the immediate future, but no one knows for sure. What is known is that corporate treasury continues to be under pressure to maximize returns on operating cash.

When it comes to interest rates, uncertainty doesn’t have to breed complacency. Though no one can accurately gauge when rates will rise, now is the time for corporate treasuries to plan, prepare and be ready for rate increases down the road.

Factoring in How Banks View Your Operating Cash

Following the 2008 financial crisis, regulators began implementing Basel III, with the objective of increasing the amount of capital that banks must hold against certain assets in order to strengthen the banking system and ensure financial institutions could withstand future market stress. This has resulted in changes to the way banks value corporate deposits, making it more important than ever for corporate treasuries to develop effective corporate liquidity management strategies.

In the past, corporates looked to expand banking providers as a means to diversify funding sources and associated services, while at the same time reducing counterparty risk. But as a result of Basel III, corporates are now seeing a greater benefit from the consolidation of banking partners, in order to maximize returns on operating cash. Banks are now actively seeking out corporates for a share of their cash management wallet to meet new capital requirements. In the face of these new dynamics, treasury needs to examine its banking relationships; to be sure they are positioned for greatest gain.

Free Up Working Capital to Reduce Reliance on Credit Lines

For corporates that rely on a line of credit, the recent Fed rate hike, and the prospect of future hikes is an area of acute concern. Obviously, as the cost of borrowing goes up for these businesses, the bottom-line is going to be impacted. Effective debt management strategies that focus on ways to reduce reliance on loans makes good sense in the event that borrowing becomes more expensive as a result of interest rate increases.

Improved working capital management is an excellent way to avoid the use of credit lines. Fifth Third Bank offers a suite of working capital management tools that optimize and expand Treasury’s ability to capture discounts and determine the most efficient method of paying suppliers, which can lower costs and improve efficiency. Armed with critical insights into AP and AR processes, Treasury can examine the terms of payments and decide on the best mix of payment types to meet the organization’s strategic objectives. And by freeing up working capital, organization’s become less reliant on credit lines to support operations, thereby reducing vulnerability to the vagaries of interest rates.

Maximizing Returns: Interest Versus Earnings Credits

For corporates with ample cash reserves, maximizing your returns requires an effective liquidity management strategy. Part of this strategy will require weighing whether to accept interest on deposits or Earnings Credit Rates (ECR), which offset bank fees, where applicable. Treasury will need to determine what is the best use of their cash? What investment vehicles make the most sense given the organization’s ratio of short-term and long-term needs? No doubt, treasury will want to seek guidance from other parts of the organization, such as tax, in order to determine which approach will deliver the best results.

Corporates would be well served to work closely with their banking partners to strategically evaluate the options available, so they can take full advantage of consolidated balances in light of potential volatility in interest rates. Fifth Third Bank can help you make the most informed decisions and help you set processes in place to achieve efficiency in treasury operations and maximize working capital.

The views expressed by the author are not necessarily those of Fifth Third Bank and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank.