The challenging economic environment has driven many businesses to enhance efficiency and control over their liquidity. Overall, setting liquidity requirements is a balancing act between the use of credit facilities, onshore cash and offshore cash, as members discussed at a NeuGroup Treasurers’ Group of Thirty meeting. In one session, members debated the strategies each use to define liquidity requirements, taking into account the various components.
One question in the discussion was when to include or employ offshore cash. The consensus was: in case of an emergency only. The dynamic of borrowing onshore while having growing levels of cash offshore is common for most, but several members agreed that offshore cash is typically not used in the overall cash liquidity calculation. Only in an extreme emergency would these funds be considered accessible after the appropriate tax haircut.
Also, when discussing the topic of setting liquidity requirements, most members use shock analysis as a key tool for determining target liquidity. Stress testing most often includes a variety of scenarios that shock the business in several ways over an extended period of time. Scenarios include worst-case assumptions for business growth, sources of liquidity and operating cash flow.
Keeping some dry powder is also a route many of the members take. As was learned in 2008, unexpected events can happen, and sometimes in greater number and with great velocity than ever imagined, so keeping dry powder available is always a good idea. It was thought to be more efficient to have this dry powder available through the use of a short-term credit facility than having to use onshore cash.
The takeaway here was that most members keep as little cash on hand (and onshore) as possible, with some type of short-term facility available in case of a liquidity event. Offshore cash balances continue to grow and most do not have an immediate strategy to repatriate these funds.