Cash – more than ‘deadwood’ on the balance sheet

Of all asset classes, cash is often seen as the least exciting. It is usually regarded as the end-result of something, rather than an asset on which to focus; and as a general rule, corporates prefer not to have large sums of cash “lying idle” on their balance sheet.

However, says Steve Rogers, joint-MD of Taquanta Asset Managers, a subsidiary of the black-owned financial services group Taquanta Investment Holdings, cash should not be regarded as balance sheet deadwood but as a valid and important asset class that can be ‘sweated’ to deliver the best possible returns.

“There’s a generally held view that a smart corporate doesn’t hold on to cash unless it can generate a return in excess of the risk-free rate for shareholders in the short to medium term.

“So, despite the fact that enhanced cash management can generate such returns, cash is treated like a necessary evil; it is dumped away in a bank and forgotten until it is needed. In fact, cash that is placed in, for example, a deposit account should be regarded as an investment that in troubled financial markets has even been known to outperform bonds and equities.”

According to Rogers, there are a number of ways corporates can effectively manage their cash apart from – as usually happens - calling various banks to periodically place funds in a deposit accounts, and then leaving it there until it is needed.

“This has a number of drawbacks. By placing funds in a single deposit account, the corporate becomes an unsecured lender to that bank, essentially taking ‘balance sheet’ risk. However, few finance departments within a corporate have the time, or indeed the know-how, to achieve proper diversification, given the need to spread deposits among several banks,” he says. “Nor do they have the time, the know-how or the economies of scale to negotiate a more favourable rate from the banks.”

And then there’s the issue of yield. Because banks have other sources of funding, they seldom need to pay highly competitive rates on relatively small deposits.

Rogers believes that as with any other asset class of investment, diversification is the answer.

The trick in cash management diversification, he says, is to use a range of banks, to deal in different types of assets and to spread the maturity profile of cash investments to reduce the risk from interest rate movements and to meet the liquidity requirements of the business.

“The goal should be to produce absolute returns – to outperform the cost of cash – without exposing the investment to market risk.

“Investors have no qualms about engaging the services of experts in specific asset classes – bonds, equities and property – in order to achieve the best possible returns. The same should apply to cash,” he concludes.