Finance team's checklist for investing surplus or idle funds

[ This article is not intended to be investment advice, and is to assist in formulating risk and governance policies.]

From time to time, most businesses accumulate idle cash/ surplus cash. Progressive companies have policies and structure in place to deal with cash forecasting and cash management. 

This article is a short guideline to what it may include and provide a finance team's checklist for investing surplus or idle funds

Recent sanctions measures have brought some risks to the fore. For example, companies that may inadvertently contravene the complex landscape of sanctions may have their bank accounts attached/frozen by OFAC contraventions. So how will tariffs and sanctions impact on idle cash management. This now makes having diversified cash funds an essential risk mitigation strategy!!!

We have also provided a sample checklist of what questions and evaluation organizations should do before investing cash with banks. Checklist-Invest idle cash | Likwidity

Cash forecasts-Tariffs and sanctions?

Always work with the latest cash forecasts and take AR/AP/Payroll/Tax and Capex into account.

Emergency buffer

As part of the company policy, factor in an emergency buffer (whether percentage or actual amount) that will be available either on call or in your transaction bank for emergency funding requirements. Only the balance after the buffer should be invested.

Diversification

• Never have all assets tied up in a single account or bank
• Have at least 2, preferably 3 banking relationships
• Diversification is regarded as a cornerstone of all investments

Duration

Match cash requirements to where and how you place the cash. (if you need funds in 30 days, then don't tie up with 60 days fixed deposits)

Maturities

When placing cash, ensure that you have diarized when the deposit matures. Some banks will automatically renew your deposit if you forget to advise them and could tie up your funds for longer and may incur costs if you try and withdraw

Limits

Set up a specific amount or percentage of funds allocated to a particular bank or institution. This ties back to diversification.

Oversight

As with most finance processes, try and ensure the 4-eye policy to ensure that at least 2 people have insight into the cash investment decision. That's just good practice.

Conflicts of interest

Relationships between internal staff and a bank official may be very close and could result in inadvertently adopting preferential treatment with that bank even though the outcome may not be in the company's best interest. Two ways of mitigating this would be to one, to ensure full audit trail and evidence of all offers and decisions and secondly, to facilitate role rotations.

Audit trail and evidence

Depending on the method adopted, i. e. by email, telephone or digital, ensure that a full audit trail is available to validate and verify any investment decisions.

Be aware of cash funds

Cash funds can be attractive places to invest cash funds but are also potentially very risky. By way of example, cash funds may have a higher return because they include other assets in the portfolio such as equities, private credit etc. These instruments are not cash and are not redeemable at request. By way of example, if a crisis erupts and the cash fund has to sell shares to repay your funds, then you may have to wait a long time and you may not get all of your funds back. Get expert advice on what each cash fund comprises.

Bank credit rating

Organizations may choose a specific risk position. For example, only to invest cash with AAA rated banks, and for others, they may have a hybrid percentage in AAA/BBB banks

Best interest duty

Generally, employees have a fiduciary obligation to act in the organization best interest. That would include ensuring that idle cash is generating the best/optimal return based on agreed guidelines

Using a broker or intermediary

When using a broker/intermediary, ensure that the broker clearly sets out what their role and remuneration will be. In particular, get warranties that no hidden rebates or commissions are earned, and conflicts of interest is stated clearly, that you can clearly understand the net and final rates achieved.

Examples of what can go wrong.

• Banks run into liquidity problems. In case you think it won't happen, there are numerous examples of banks failing or having a run on liquidity
• Unintended collusion between a bank official/broker and a staff member. The bank official could offer an inducement to attract a deposit offering a sub-par return
• Banks have system issues that impacts availability to funds

Checklist-Invest idle cash | Likwidity

These tasks can be automated with the Likwidity platform. See how here

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