Higher Rates Reinforce Value Of Treasury Management Fundamentals

1. Optimizing liquidity. Company treasurers are taking a fresh look not only at the yields of money market mutual funds (MMF) but also at the relative return of using earnings credit rate (ECR) to offset fees as opposed to paying fees out of pocket and shifting liquidity to earning assets.
   
   

   While most larger companies are doing direct investments, many will also use MMF sweeps, if the economics work, because sweeps require less effort. It’s notable that in the last higher-interest rate environment, large companies used both direct investment and sweeps on their primary collection account. Through this combination, they calculate their cash position in the morning and invest or liquidate the MMF to balance the position. But they then use a sweep MMF, provided by the bank, to invest end-of-day balances that accumulate after the cash position has been calculated.

   With betas on ECR trailing those on interest-bearing deposits and money funds, bankers should be prepared with an answer for each of their clients for the best approach to navigating these tradeoffs.

2. Debt. While many companies initiated refinancings and anticipatory borrowing in 2021 or before, company treasurers in 2023 will pivot to reducing debt and its associated interest expense. They’ll be seeking help from banks that can provide less expensive access to credit through asset-backed lending programs and working capital/supply chain financing.
   
   
3. Working capital. In this environment, corporate treasurers will likely approach their banks for help in reducing the net amount invested in working capital, through cash conversion cycle optimization, and banks offer some tools that do exactly that:
   • Accounts receivable. One way to improve working capital is to accelerate cash inflows. Companies can do this by implementing more efficient billing and collections processes, offering early payment discounts and even considering invoice factoring to convert receivables into cash. Corporates will also be looking for ways to lower days sales outstanding. Shortening customers’ payment periods is an obvious option, but credit-terms agreements with customers and competitive conditions often sharply limit what’s possible. To respond, banks can offer receivables financing and treasury services cash management tools to accelerate customer payments and lower the amount of capital needed to support accounts receivable.
   • Accounts payable. Treasurers will want to extend their own credit terms whenever possible, but in a manner similar to that of accounts receivable, competitive pressures and agreements with supplies may hinder these efforts. In this instance, banks can offer commercial card programs that will effectively slow the outflow of their clients’ cash.
   • Inventory. To the extent possible, companies will want to reduce the amount of funds tied up in inventory while at the same time mitigating the risk of running out of stock. Because companies have already invested considerable resources to minimize days inventory, this aspect of working capital management has it limits. Banks can, however, assist through inventory financing and, indirectly, with purchasing card programs.

Higher interest rates and a slowing economy present obvious challenges to banks, but they also present opportunities. Because improvements to managing working capital are always complex multi-step processes, corporates will appreciate the bank that takes a detailed consultative approach to finding helpful solutions, which includes deploying their entire spectrum of cash management tools.