Liquidity is not binary. Treating all cash as if it were required immediately may protect against risk, but it can also quietly erode value. Mokgadi Skwambane, Head of Corporate Business Development at Sasfin Asset Managers shares insight on why idle cash doesn’t serve business needs.
Cash remains the lifeblood of any organisation. Managing it well is one of the most important and often least challenged functions of treasury management. For CFOs and treasurers, the question is no longer simply whether capital is safe and liquid. It is whether liquidity is being managed with intent. In a low-rate world, that distinction matters.
Corporate treasury management has traditionally been guided by a clear hierarchy of priorities: capital preservation first, liquidity second and yield a distant third.
This framework has served organisations well, particularly through periods of market stress and financial dislocation. However, as interest rates decline and money market yields compress accordingly, it is worth reconsidering whether long-standing treasury policies remain fully aligned with current economic conditions.
This is not a call for greater risk taking. Rather, it is an invitation to reflect on how liquidity, risk and opportunity cost are defined, and whether policy rigidity may be unintentionally diluting the value of corporate cash buffers.
Cash is king
The importance of cash management lies not in the asset itself, but in what cash enables. Cash reserves act as a buffer against operating volatility, reduce the probability of financial distress, and enhance financial flexibility when access to external funding becomes constrained. Maintaining cash at an appropriate level strengthens financial resilience and supports organisational self sufficiency.
The theoretical foundations of corporate cash holdings are well established. Drawing on Keynesian principles, companies hold cash for three primary reasons: transaction motives to meet day-to-day operational requirements, precautionary motives to absorb unexpected expenditures or shocks, and speculative motives to capitalise on unforeseen opportunities.
From a treasury perspective, the precautionary motive typically dominates. Liquidity, understood as the ability to meet short term obligations as they fall due, becomes paramount. Yet this emphasis introduces an inherent tension between liquidity and profitability.
The cost of playing it too safe
From a liquidity standpoint, holding substantial cash reserves is prudent. From a profitability standpoint, idle cash is inefficient. Cash that is not deployed in operating activities or invested appropriately generates limited economic value, particularly in a declining interest rate environment. The opportunity cost associated with excess liquidity becomes increasingly visible as yields compress. This cost reflects not only the return foregone by holding surplus cash in ultra short instruments, but also the structural inefficiency of investing all liquidity as though it were required immediately.
In practice, effective treasuries forecast cash flows with a high degree of confidence. Payroll cycles, creditor payments, statutory obligations and capital expenditure are largely predictable. While a portion of cash must remain instantly accessible, it is rarely the case that all surplus balances are required on an unplanned, same day basis. Liquidity, in reality, exists on a spectrum. Treating it as a binary concept, available today or unacceptable, can introduce inefficiency into cash management frameworks.
Conditioned for conservation
Internal treasury policies often reinforce this rigidity. Many policies restrict surplus cash to call accounts, fixed deposits, or traditional money market instruments, frequently based on classification rather than underlying risk characteristics. This conservatism is understandable. The global financial crisis of 2007 to 2009 fundamentally reshaped the role of the corporate treasurer. The focus shifted decisively from earnings optimisation to liquidity preservation as funding markets became unreliable and instruments previously assumed to be liquid proved otherwise. These experiences left a lasting imprint on treasury governance, and rightly so.
However, caution can evolve into inertia. In a lower rate environment, policy frameworks that are slow to adapt may unintentionally lock organisations into sub optimal outcomes. When investment decisions are driven by labels rather than fundamentals, opportunities for improved cash efficiency are easily overlooked. This is particularly relevant where short duration, high quality investment exposures are treated differently despite exhibiting comparable credit risk profiles.
From defence to value
In compressed yield environments, incremental returns matter. Differences measured in basis points can translate into meaningful financial outcomes when applied to large and persistent cash balances. For corporates, this can elevate treasury from a purely defensive function to a visible contributor to financial performance. For public institutions, improved returns on temporary cash holdings can have tangible social impact, allowing scarce resources to stretch further without increasing balance sheet risk. These outcomes are not the result of aggressive positioning. They arise from aligning investment horizons with actual liquidity needs.
Treasury investment policies should therefore be viewed as living frameworks, not static documents. Regular review and thoughtful refinement are signs of strong governance, not increased risk appetite. Policies that articulate principles such as acceptable credit quality, liquidity tolerance, and oversight mechanisms, rather than prescribing an overly narrow set of instruments, are better positioned to adapt as market conditions evolve. In a declining interest rate cycle, the cost of not revisiting these assumptions becomes increasingly apparent.
Ultimately, cash is not merely a placeholder on the balance sheet. It is a strategic asset. Managing liquidity with intent requires asking more nuanced questions about how much cash is truly required at each point in time, and how the remainder can be positioned responsibly. This is not about abandoning prudence. It is about ensuring that prudence does not become a barrier to progress.
What is really being left on the table?
That question is not about chasing yield. It is about whether existing treasury assumptions still reflect reality, and whether idle cash is being allowed to remain idle by default. In a low rate environment, the opportunity cost of inaction is no longer invisible. For CFOs and treasurers willing to revisit long standing conventions, the conversation around liquidity may be one of the most valuable strategic discussions they have this year.
