According to the 2017 AFP Strategic Role of Treasury Survey, over 60% of organizations measure treasury's success by its ability to reduce borrowing costs and/or to achieve liquidity targets.
Increased scrutiny specific to liquidity and risk exposure — both from senior management and from company boards — is the driving force behind treasury's increasingly strategic role, according to 73% of respondents.
As deposit and liquidity specialist at First Horizon Bank, James Long is on the front lines of helping the bank's business clients manage their cash deposits and liquidity. (In the AFP Survey, 64% of respondents cited cash management and forecasting as a primary focus for their treasury departments over the next three years.)
Here, he answers questions about clients' major concerns specific to managing deposits, minimizing risk, and maximizing yield.
Companies' Concerns About Liquidity and Yield
Q: What are your business clients' biggest concerns relating to deposits and liquidity?
A: There are two main objectives to the treasury operation in any corporation: to protect principal and ensure liquidity. I always get told the same thing.
We hear a lot of treasurers and cash managers say, "I get an 'attaboy' if I get some extra yield, but if I can't get our money when we need it, I can get fired." So that's top of mind for most treasurers.
Also, treasurers want to be able to get their company's money back on short notice. Clients are concerned with same-day liquidity, especially for operational cash: They need and want to have same-day liquidity when it's time to make a transfer or pay a vendor.
Q: What about the yield companies are earning on their deposits? Where does that come in?
A: After protecting principal and ensuring liquidity, yield is the next big concern companies have. We've been in a low-rate environment where, from late 2008 to 2015, interest rates were basically zero. It didn't matter where you were — bank or money market fund or elsewhere — you weren't getting any yield. Now you're starting to see opportunities for better returns on overnight cash. So yield is getting to be more and more of a driver for a lot of companies' treasurers. If you feel you have the first two covered — that you're protecting principal and ensuring liquidity — then you want to make some return on your money as well.
Managing Safety and Liquidity
Q: What about safety? Do customers appreciate that First Horizon Bank is FDIC insured?
A: The FDIC only covers up to $250,000, and a lot of these companies are going to have $1 million or more on deposit. So FDIC insurance matters to firms. But when you get to a lot of the large commercial clients, and some of the mid-sized commercial clients, it's the quality of the bank and their relationship with the bank that makes the difference. The First Horizon family of companies, which includes First Tennessee and Capital Bank, has been in business for over 150 years and has a solid track record.
Before the Great Recession, you had more and more people trying to get extra yield.
Then the recession happened and everybody pulled back. So many people got burned by that and by what happened with a lot of the short-term instruments and investment options.
The collapse of investment bank Lehman Brothers in September 2008 is an example of how critical liquidity is to institutions. What ultimately brought Lehman Brothers down — and helped deepen what became known as the Great Recession — was that they ran out of liquidity. They could not fund their day-to-day operations and they didn't have anybody who would let them borrow money, even overnight. The fourth largest investment bank in the U.S. had no other alternative than to declare bankruptcy.
This shows the importance of managing your liquidity. It is vital for businesses to make sure they have their money when they need it and that they retain all the money they put in originally. There are a lot of ways folks can do that. But one of the main ones for all clients — in terms of being able to provide that safety of principal, as well as liquidity — is banks and bank deposits.
Improving Liquidity and Efficiency
Q: What are you doing to improve cash flow and liquidity solutions for businesses?
A: There are a lot of ways to manage liquidity. It's not just that you get your receivables as quickly as possible and maximize the length of time between taking in receivables and sending out payables. Another way to do that is yield — you can optimize your returns.
Yet another way you can do this is to lower your debt expense. In forecasting and planning for growth, you try to ensure that you have adequate funds for both short-term opportunities and for strategic goals.
We're always looking for ways for clients and prospects to gain efficiencies.
Part of that is through the cash conversion cycle. They're trying to get their revenues in as quickly and efficiently, and cost-effectively, as possible. Then they want to put that money on deposit. That's where safety and liquidity come in. We want to make sure they can get their money when they need it.
Businesses want to get paid quickly and also extend their payments to vendors. They are trying to shorten the time on the front end and extend it on the back end. And, in between, get a good return on their funds. And we have some products that help them do that.
Assisting With Forecasting
Q: What kinds of help can you give clients on forecasting?
A: One of the things that I do for clients is give them a feel for what we're seeing in the economy and marketplace, especially as it relates to the Federal Reserve. The Fed sets short-term interest rates and a lot of rates are set off of that. Their meetings are highly anticipated and their statements, both written and verbal, are parsed to the Nth degree by everybody. This has a profound effect on the economy because it helps drive rates.
Also, they do a lot of their forecasting based on previous data. So another thing I like to do is talk to clients about what we're seeing macroeconomically, how it relates to the Fed, and how that relates to the yield curve. That's very impactful for our clients and prospects.
One of the keys to the ongoing success of your business is the strength of your banking relationship. To learn more about First Horizon Bank solutions that can help your business focus on deposit security, liquidity, and yield, speak with a banker today.
