Large healthcare company
The client wanted to stabilize and increase their interest income. Since 2008 their interest income had declined from over $6 million per year to less than $500,000 annually. Their balances were allocated to maximize their earnings credit rate at their bank ($50mm), which they believed were earning 35 basis points, and the remaining balances ($110mm - $130mm) were invested in government money market funds or repurchase agreements earning around 2 basis points. The client anticipated net financial benefit was around $92,000 annually ($20,000 interest earnings and $72,000 bank fee reduction).
The company felt they had excess cash but didn’t have the time, personnel or know-how to effectively analyze their cash. The client was frustrated by the reduction of income and wanted to increase earnings but needed to do so without adding risk. The investment objectives are safety, liquidity and level of return.
Potential course of action:
We perform a detailed cash flow and balance analysis on this company that evaluates the company’s balances, allocation, earnings and cash flows by collecting data from their statements or accounting system. This study provides significant findings that reveal opportunities for this company to reallocate assets to help generate greater earnings. A summary of these findings shows:
Even though monthly cash flows exceeded $60mm, the timing of those cash flows was relatively well aligned and their balances never fell below $100mm.
The company’s daily cash flow created additional opportunities because of the volatility of their cash flow. The company needs to maintain immediate liquidity of approximately $8mm - $10mm and would likely spend close to $60mm between major cash inflows.
The company’s liquidity was excessive, creating opportunities to increase earnings through tactical liquidity management with $75mm - $100mm.
Additional earnings could also be found by actively managing cash with $60mm - $80mm.
We recommend the client divide funds into three distinct cash/investment sleeves based upon the cash flow model, economic environment, and our understanding of the company’s business practices.
To help preserve capital and liquidity over return, we utilize our daily cash management process targeting $5 million balance in their checking account to cover daily expenses with an average additional $45mm in liquidity to fund operations.
To help preserve capital over liquidity and return, we would create a secondary cash/investment pool with approximately $30mm. These funds will be used for near-term expansion and to help weather any cyclical business changes.
To help create return over capital preservation and liquidity, we would create a strategic investment pool with $80mm that shifts the priority toward return. In addition, we would recommend the earnings from this portfolio be reinvested into an equity portfolio attempting to help generate additional growth opportunities.
This material is hypothetical in nature and not intended for use as investment advice. It does not guarantee the attainment of your retirement goals. Individual results will vary.
There is no assurance that any investment strategy will be successful. Investing involves risk and investors may incur a profit or a loss. Asset allocation and diversification do not ensure a profit or protect against a loss. Past performance is not indicative of future results.