How Companies Segment Cash to invest in Supply Chains

With all the talk about how much cash corporations have to fund their supply chain, I thought it would be a good idea to examine how companies view their cash.

Here are three things to keep in mind about a companies cash:

  • First companies segment cash into distinct pools.
    1. Operating cash to meet daily cash needs - this has a term of 1 to 30 days and generally is very secure, invested in bank time deposits, high grade commercial paper, and money market funds.
    2. Liquid cash to meet projected and unexpected cash needs over 1 to 12 month time horizon. Here safety of principal, liquidity and yield are balanced. For example, companies may have a 3 year maximum maturity with 1.5 year average duration and the worse credit quality asset may be A- with an average of AA
    3. Strategic cash with no forecasted cash flows
  • Second, to manage cash, companies may use outside managers to leverage investment expertise and to be cost effective. Building inhouse capabilities is expensive (investment banker types aint cheap). Outside managers can help set proper risk tolerances.
  • Third, companies have investment guidelines which aid in their asset selection. For example, can they trade receivables of other companies? How low a rating can they go to deposit funds into a bank for term deposits?

So with early pay programs, bear in mind that these dollars to fund a supply chain come from somewhere and are not necessarily idle sitting not invested.

Now on a company’s balance sheet this all looks the same – it comes off as Cash & Cash Equivalents (“C&CE”). The accounting rules are really tight around what that means. But some companies have so much cash lets say they turn into an investment company because they are sitting on so much.

Many investment advisors are trying to come up with creative ways to help companies deploy this cash. The biggest challenge they find is how much is categorized as C&CE. Generally it is 90 days and shorter, and liquid and once you step out of that range you don’t have to meet that Boards definition of C&CE and their investment policies.   Once companies move into other investments, it would move to Short Term Investments or Securities Held for Sale, and there is a whole bunch of accounting treatment that must go on.

This is big business, and one investment advisors, lawyer, banks, accountants, etc. are actively trying to find product solutions with better return/risk tradeoffs. The challenge is finding product to invest. Companies are certainly waking up to investing in their own supply chains.

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