The key to success in liquidity management is to strike a balance that offers you easy access to your ready cash, while taking advantage of the rising interest rates. Where do you start? Sweep accounts are the easiest and most efficient way to manage the investment of your operating cash. A sweep account is a bank account from which, at the close of each business day, the bank automatically transfers amounts that exceed a certain level into an income-earning account or investment.
Your working-capital needs are taken care of, excess funds earn income overnight and, best of all, you don’t lift a finger. However, you may not be aware of the many ways to make a sweep account work for you.
Money market investments
Until recently, funds transferred to sweep accounts were usually invested in traditional money market investments, such as repurchase agreements or commercial paper. These short-term investments feature flexible maturities that react daily to changes in interest rates.
Other investment options may not react to interest rate increases for up to 30 days, making money market investments an ideal place to park funds on a temporary basis. The funds are swept from your account after the close of business and returned the next day, along with any accrued interest.
Money market mutual funds
While repurchase agreements and commercial paper remain a viable option, money market mutual funds have become attractive to businesses due to strong ratings and diversification. These accounts allow you to determine how much operating cash you need on a daily basis, and keep the rest in a flexible money market mutual fund account to continue growing.
Unlike traditional sweep accounts, the money remains in the investment account until needed in your checking account. Any cash above the account’s target balance is invested in the sweep account at the end of the day. The sweep investment balance is still available to the business, if needed.
If your business requires as little as $100,000 in daily operating cash, a sweep account may be quite useful. A low monthly fee is usually associated with sweep accounts generally less than $200.
You may choose to stay with the more traditional sweep accounts involving repurchase agreements or commercial paper, based on your investment policies and guidelines. Money market mutual fund accounts, however, allow for greater flexibility in investment type, including tax-exempt options and diversification.
If you’re looking for a short-term, but not day-to-day, way to manage excess operating cash, a direct investment may be a good option. Direct investments enable you to invest some operating cash in an interest-bearing bank deposit, a U.S. Treasury bill, commercial paper or short-term, tax-exempt municipal bonds.
These are generally 30-day to 90-day investments, with higher yields than traditional sweep accounts. Direct investments are more complicated and require more monitoring. They are appealing for businesses willing to take on a little more risk and that have at least $5 million to $10 million in assets to invest.
They are a good fit if you can identify this amount of expendable operating cash each month. However, if you redeem a direct investment early, there may be a risk that the investor could lose money.
While it may take some time to learn the complexities of each sweep option, it may be well worth it especially in an environment of rising interest rates. Call on your trusted financial adviser often, if necessary for more information about all of your options.
This was prepared for general information purposes only and is not intended as specific advice or recommendations. Any reliance upon this information is solely and exclusively at your own risk.
Denise Monahan is senior vice president and sales manager for corporate at PNC Bank, National Association, member of The PNC Financial Services Group Inc. Reach her at (856) 489-2972.