At first thought, it seems as if having a mountain of cash to manage is a problem most companies would like to have, but it’s a real problem nevertheless. To be sure, the large majority of companies are able to deal with their cash and short-term and longer-term monetary investments because the amounts are small enough to be manageable. Indeed, many companies, especially smaller ones, face the opposite problem and spend more time focused on their uncertain funding requirements. Still, over the past decade highly profitable companies have been generating more cash than they need to fund expanding operations and capital spending requirements (Apple and Oracle are two examples), and now they have to manage it. Larger companies may have portfolios in the tens of millions to billions of dollars in multiple currencies in multiple jurisdictions, so there’s a lot at stake.

Corporate treasurers in larger companies with substantial cash and equivalents assets face a more complex issue than one might think. Varying with the internal skills of a company’s people and its desire to develop and sustain an internal competence to manage cash, most reach a point at which it makes sense to hire asset managers to take care of investing some or most of these funds. When multiple internal and external money managers are involved, it vital that a company be able to track, analyze, assess and report on all these assets in a unified fashion as quickly and efficiently as possible.

At the very least, treasurers have a basic requirement: to keep track of the money and to calculate and report the returns from those investments. To do that efficiently, they need a consolidated view of these investments and an ability to examine the aggregate set of investments along multiple dimensions, including maturity, currency, asset class and credit quality to name four. When there are many transactions, it’s important to automate the data collection and reconciliations process to reduce workload and speed the availability of reliable information.

Then there’s reporting, which can be complicated for companies with large investment portfolios because of differences that often exist between statutory and tax reporting rules. It becomes even more complicated when subsidiaries in other countries have to report amounts in their local currency using different generally accepted accounting principles (GAAP) – such as US GAAP for headquarters but IFRS for the business unit in France – and there are differences in tax accounting rules in each country.

The treasury function has to manage cash on a daily basis, so it needs visibility into maturities for the portion of the portfolio it controls. For the externally managed portfolios, it needs daily income statements, account statements and statements of cash flows.

There also is an important risk management dimension to managing large corporate portfolios. Today’s unsteady financial environment requires constant vigilance. Corporate treasurers need to handle their investment portfolio risk across multiple dimensions, including quality, diversification, maturity and duration, issuer and issuer type, currency and country. They need reports that help them monitor risks by using the appropriate analytics to measure the risks, and they need alerts that provide the appropriate people when out-of-tolerance conditions exist and finally the ability to drill down to gain a complete understanding of source of
risks to the portfolio.

Having established risk parameters, treasuries must ensure that external and internal managers are operating within those parameters. It’s unsettling to discover that the manager who was hired with a mandate that spells out acceptable and prohibited asset classes (for instance, maturities of a year or less, commercial paper must be investment grade and no sovereign debt other than U.S. Treasury bills) has actually bought a five-year corporate bond with a junk rating. It’s easier to correct if you are alerted immediately or within a day that a portfolio is out of compliance with its investment mandate.

And finally, exercising due diligence means treasurers must be able to assess the investment performance of their external and internal managers against the appropriate benchmarks, both in aggregate as well as by securities classes.

Having the right software is a necessary first step for treasurers who have large cash and investment balances to look after. Desktop spreadsheets might be sufficient for small organizations and those that do not have large volumes or complex requirements. However, I advise companies that find that they do not have the ability to manage the accounting, risk, compliance and performance assessment dimensions of their liquid investment portfolios to adopt software that will enable them to do so. The benefits can be expressed in monetary terms.

Robert Kugel – SVP Research