The rate sheet is the last question, not the first. Most of the surplus is spoken for before it earns anything, and the largest bank already holds more than the policy allows.
A relationship manager offers a term deposit at 2.60 per cent. A money market fund on the other screen pays 2.90 per cent. On 120,608,000.00 the difference is 361,824.00 a year — 0.2154 per cent of EBITDA, and 6.9156 per cent of a single day's disbursements. The yield does not decide this question. What the 361,824.00 buys or costs in liquidity, credit and accounting does.
Worked in full in Treasury Management by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
| Instrument | Rate | Annual income |
|---|---|---|
| Money market fund | 2.90 per cent | 3,497,632.00 |
| Treasury bills | 2.75 per cent | 3,316,720.00 |
| Bank deposit | 2.60 per cent | 3,135,808.00 |
| Best less worst | 361,824.00 |
The order is not negotiable, and the reason is that most of the surplus is not surplus. Minimum liquidity on this company is 124,596,281.16: the operating float of 31,392,000.00, a forecast-error reserve of 31,204,281.16 and a seasonal peak of 62,000,000.00. The float has already been taken out of available cash, so the part the surplus is tested against is 93,204,281.16 — which leaves 27,403,718.84, or 5.2377 days of payments, genuinely spare.
So 93,204,281.16 of the 120,608,000.00 is the reserve and the peak, held in advance against a bad quarter. Security first, because a loss of principal on the reserve is a hole in the minimum. Liquidity second, because a reserve that cannot be reached in the week the forecast error arrives is not a reserve. Yield third, because the whole distance between the best and worst choice is 361,824.00, and the distance between having and not having 120,608,000.00 in a bad quarter is the company.
The largest bank holds 41 per cent of reported cash, which on 214,000,000.00 is 87,740,000.00. The policy limit is 25 per cent, or 53,500,000.00. The excess is 34,240,000.00.
It did not arrive by accident and it will not leave by memo. That bank is the revolver agent, the holder of the concentration account and the payment bank. The 68,400,000.00 cleared on the concentration account this morning is 31.9626 per cent of reported cash on its own — over the limit before a single deposit is placed — and the rest, 19,340,000.00, is what the deposit proposal would add to. Moved into the fund instead, the excess would earn 102,720.00 more; for once the concentration test and the yield point the same way.
A deposit is not cash held at a bank. It is an unsecured loan to the bank, and on the morning the bank fails it becomes a claim ranking with the bank's other unsecured creditors, for whatever the resolution eventually pays and whenever it pays it. For a company with a daily payment run of 5,232,000.00, a claim of that shape is not liquidity in any reading of the word.
The failure of the largest bank takes more than the 87,740,000.00. It takes the concentration account, so the 68,400,000.00 that was same-day cash this morning is frozen; it takes the payment rails, so tomorrow's run has no bank to leave from; and it takes the agent of the revolver. Where the bank is also a lender, set-off between deposit and loan may run in the company's favour or against it, depending on what the documents say — which is a thing to read before the morning it is needed.
The fund is not free of this either. It spreads issuer risk, which is the point, but it can restrict redemptions under its own rules in a stressed market, and its assets are marked, not guaranteed. Bills carry the sovereign's credit and no bank's, and their price for that is the 180,912.00 they earn less than the fund. None of the three is the safe one. Each is a different counterparty.
Nothing should be locked for longer than the thirteen-week forecast can see, and inside the thirteen weeks each part of the surplus has a date.
| Part of the surplus | Tenor it belongs at | Amount |
|---|---|---|
| Forecast-error reserve | overnight — needed in any week | 31,204,281.16 |
| Seasonal peak | at term, maturing into the build it pays for | 62,000,000.00 |
| Above the minimum | where the forecast says, if at all | 27,403,718.84 |
| Available cash | rolled every week as the forecast rolls | 120,608,000.00 |
The next time the surplus comes up, the number on the table will be a rate. Let it sit there while three others are put beside it. The share of the surplus inside the minimum liquidity: 93,204,281.16 of 120,608,000.00, with 27,403,718.84 outside it. The largest bank's share of cash against the policy limit: 41 per cent against 25 per cent, an excess of 34,240,000.00. And the week of the thirteen-week forecast into which each piece matures.
Only then the yield: 361,824.00 between the best and the worst choice, and worth having if the three answers above are unchanged by taking it.
In that order: security, liquidity, then yield. On the company in this book the three candidates are a fund at 2.90 per cent, bills at 2.75 per cent and a deposit at 2.60 per cent, and the whole distance between best and worst is 361,824.00 a year — 6.9156 per cent of one day's payments, which is not enough to decide anything on.
Only what sits above the minimum liquidity. Here available cash is 120,608,000.00, the minimum above the float is 93,204,281.16, and what is genuinely spare is 27,403,718.84 — 5.2377 days of payments.
A cap on how much of the group's cash may sit with any one bank. Here the largest bank holds 41 per cent of reported cash, 87,740,000.00, against a 25 per cent limit of 53,500,000.00: an excess of 34,240,000.00, most of which is the concentration account itself.
This article is one calculation from Treasury Management. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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