The current round of US interest rate hikes is already the fastest upward shift in monetary policy since the 1980s1 - a rapid reversal of a situation, where the cost of borrowing had sunk so low that some European countries offered negative rates.
For some corporate treasurers, these new monetary policy conditions present significant cash management challenges. This is especially true for companies with high levels of debt that must now manage higher repayment costs. Another group of companies that need to adjust are fast-growing technology businesses that in the past could rely on fresh rounds of funding to maintain their cash position.
Companies in this situation should look closely at their liquidity situation and debt obligations so that they can assess how much cash they have available, as well as their future outgoings. For companies with geographically dispersed operations, centralising funds can help ensure that the business is able to fully utilise its money, while providing broader benefits to operational efficiency.
Risk management has also grown in importance, due to recent market developments and the need to manage counterparty risk more effectively. Suppliers, for example, might have reduced access to affordable capital, which can affect their ability to meet their obligations to buyers.
Going forward, treasurers can pay more attention to contracts, assess their liquidity situation, and manage concentration risk by reviewing banking relationships in a more holistic manner. Now is a good time for treasurers to re-evaluate how they can manage the company’s cash in an uncertain, and volatile macroeconomic environment.
Another important consideration for corporate treasurers is the investment strategy, which will likely need to be adjusted to reflect the new monetary backdrop. Even businesses with healthy reserves should reassess their investment policies so decisions related to the management of cash follow a detailed framework that covers everything from asset allocation and investable securities, to yield, duration and credit ratings.