CORPORATE CASH
MANAGEMENT TECHNIQUES
The day-to-day management of your company’s finances requires your full-time attention, leaving little time for you to be an
expert at investments and their markets. All too often, when you search outside for professional help, it can be difficult to
command the kind of services you need, on the scale you need them.
Alert cash management and diversification of your company’s assets can significantly improve the performance of your shortterm investment portfolio. At Piper Jaffray, you can have nearly unlimited flexibility in designing your cash management program.
Here are a number of ways you can let your money work a little harder.
MONEY MARKET FUNDS
Money market funds invest in short-term debt instruments,
including commercial paper, negotiable certificates of
deposit, Treasury bills, federal funds borrowing, discount
notes and a variety of other liquid investments. Generally,
money market funds have current income, consistent with
preservation of capital and maintenance of liquidity, as an
investment objective. An investment in money market
funds is neither insured nor guaranteed by the U.S.
government and there can be no assurance that the funds
will be able to maintain a stable net asset value of $1.00
per share. Prospectuses are available from your Piper Jaffray
financial advisor. They contain complete information on
charges, investment objectives and operating policies. Please
read carefully before investing or sending money.
LIQUID CERTIFICATES OF DEPOSIT
Perhaps you’ve purchased certificates of deposit (CDs) to
lock in an interest rate. Unfortunately, your cash was
locked, too. This is not true of all CDs. At Piper Jaffray, for
example, we offer CDs from financial institutions that you
can sell back to us at any time with no interest penalty. The
price you receive could be higher or lower than the original
price, depending on prevailing interest rates. These CDs are
FDIC insured up to $100,000 per depositor, per depository
institution.
TREASURY BILLS
You may already be familiar with these benefits of all
securities issued by the U.S. Department of Treasury,
including:
• Credit safety—they have the backing by the
U.S. government
• Convenience—they are easy to convert to cash
• State tax exemption (if held by an individual or
partnership)
Treasury bills (T-bills) are of short-term duration—three,
six or 12 months. Consider some of the special benefits of
T-bills for your short-term money:
• Issued at a discount—Unlike longer-term Treasury notes
and bonds, T-bills pay no interest. Instead, the yield you
earn is the difference between the price you pay and the
maturity value. So less front-end cash is required.
• Tax deferral potential—With careful timing of maturity
dates, you can defer taxes on your gains for up to 15
months. For example, a T-bill maturing in January has a
gain that may not be federally taxed until as late as
March 15 the following year, depending on your firm’s
year-end.
• Convenient purchase/sale—If you purchase T-bills
through Piper Jaffray, rather than the Federal Reserve,
you benefit from convenience and liquidity. The Federal
Reserve auctions T-bills every Monday at noon. The Fed
will not cash in your T-bills for several weeks after
purchase and before maturity. Piper Jaffray, you can
convert your T-bills to cash on one day’s notice. This can
be a real advantage if you encounter a financial
emergency. (Like most investment firms, Piper Jaffray
charges a small fee to cover paperwork on T-bills.)
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Corporate Cash Management Techniques
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TREASURY NOTES AND BONDS
Treasury notes and bonds are typically available in
maturities one to 10 years (notes) and 10 to 30 years
(bonds). Many investors ignore these because they
mistakenly assume that the securities must be held until
maturity. But the presence of an active trading market
means buyers and sellers may be found, regardless of the
maturity. Prices may be above or below original cost,
depending on current interest rates. Some investors, in fact,
employ sophisticated bond trading strategies based on
expected interest rate movements.
TREASURY BILLS, NOTES AND BONDS
TYPE
MATURITY
MINIMUM
DENOMINATION
Treasury Bills (T Bills)
Treasury Notes (T Notes)
3,6,12 months
1 to 3 years
4 to 10 years
More than 10 years
$10,000
$5,000
$1,000
$1,000
Treasury Bonds (T Bonds)
GOVERNMENT AGENCY SECURITIES
A variety of U.S. agencies issue “discount notes” for their
short-term borrowing needs. Discount notes carry
maturities ranging from one day to 360 days. They are
issued at a discount to their face value and pay interest at
maturity. Discount notes are issued in minimum denominations
of $100,000, with increments of $1,000, and are issued by
the Federal Home Loan Bank, Federal Farm Credit Bank
and the Federal National Mortgage Association. In
addition to discount notes, these agencies also issue
coupon-paying notes with maturities one year and longer
with interest paid semiannually. The yield on agency
securities is generally higher than U.S. Treasury issues and
lower than corporate securities. While agency issues are not
direct obligations of the U.S. government, some agencies
carry the government’s moral backing.
Securities such as Government National Mortgage
Association pass-through certificates (Ginnie Maes) are
U.S.-backed issues that range in nominal maturity from five
to 30 years. They typically provide better yields than
Treasuries with similar maturities. Plus, they have an
excellent track record of payment. Yields will vary with
changes in market conditions and the prepayment rate of
the underlying mortgages. An active secondary market
exists for Ginnie Maes; prices for those bonds sold on the
secondary market may be above or below original cost,
depending on current interest rates.
COMMERCIAL PAPER
If your company can invest $100,000 or more for a very
short time, consider commercial paper. You can often buy
commercial paper to mature on the date you need your
money. And the yields are surprisingly competitive.
Commercial paper is an IOU of a large, creditworthy
corporation (typically to finance seasonal or other shortterm needs). Such corporations usually have over $100
million net worth and $1 billion in sales. They borrow for
an average of 30 days (with a legal maximum of 270 days).
MUNICIPAL SECURITIES
Invest surplus cash in municipal securities? Obviously, if
your company’s tax bracket is high enough, the advantage
of paying no federal income taxes on interest (and sometimes
no state income tax) can make a significant difference in
your cash flow.
CDs are federally insured and offer a guaranteed rate and
return of principal upon maturity. But, if you’re in a high
tax bracket, the after-tax income from buying municipal
bonds is likely to exceed the pretax yield on taxable
alternatives, such as CDs.
The table below compares the bottom-line difference of
investing in five-year CDs versus long-term municipal bonds.
In five years, this municipal bond provided an extra $1,087
of income. Even if the bonds were sold after five years at a
loss, as long as the loss was $1,087 or less, the company
would still net the same after-tax yield and also have a
deductible capital loss.
0-YEAR MUNICIPAL BOND VS. FIVE-YEAR
AAA-Rated 20-Year
Muni Bond at 2.72%
Investment
Annual Interest
Taxes (at 35% bracket)
Annual after-tax return
Five-year return
$100,000
$2,720
0
$2,720
$13,600
Five-Year CD
at 3.85%
$100,000
$3,850
$1,348
$2,503
$12,513
Some municipal bonds may provide income that is subject to the federal
alternative minimum tax and state and local taxes. Municipal bond prices
fluctuate with interest rates, so you may receive more or less than you paid
if you sell prior to maturity. This example does not include commissions.
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Corporate Cash Management Techniques
SEVEN-DAY MUNICIPAL FLOATERS
If you are still concerned about the market risk of owning
long-term bonds, consider seven-day municipal floating
rate issues. These were developed as a vehicle to allow
issuers of tax-exempt debt to borrow long-term at interest
rates geared to the short-term market. Interest rates are
reset weekly with most issues paying interest on a monthly
basis. Bondholders have a seven-day put, which is typically
backed up by the strength of a letter of credit on the issue
provided by a domestic or international banking institution.
Issuers usually have the ability to call the bonds on 30 days
notice and denominations are generally $100,000
minimums and multiples thereof.
PREFERRED STOCK
Could your corporation use a big tax break on investment
income? Federal law allows sizable tax savings for investing
in another domestic company’s stock (either common stock
or certain preferreds). Seventy percent of shareholder
dividends can be excluded from your corporate federal
taxable income. This does not include dividends received
from or by “S” corporations. Stocks must be held 46 days
or longer for the exclusion. Also, some states allow even
greater dividend exclusion under certain conditions. Be sure
to consult your tax adviser. Borrowing money to purchase
this investment may alter the tax consequences.
THE 70% EXCLUSION: A TAX BREAK EXCLUSIVELY
FOR CORPORATIONS
If your company is in the maximum 35% corporate tax bracket, your tax
rate on dividends would be just 10.5%:
30%
Taxable portion of dividend (100% minus 70%)
x
35%
Highest corporate tax rate
10.5% Maximum tax on dividends
Why preferred stock? Both common and certain types of
preferred stock dividends are eligible for this exclusion.
Many corporate investors like preferred stock because of its
pre-stated dividend and the first claim on dividends paid
(ahead of common stock). Also, preferred stock usually has
more generous dividends and less volatile prices than common
stock. However, because preferred stock dividends are
fixed, they tend to act like bonds in their price movements
and you can experience losses if interest rates rise.
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Volatile bond markets in recent years have sent many firms
in search of excludable dividend investments with less price
volatility. One response has been the introduction of preferreds
with an adjustable or variable dividend rate. The dividend
is adjusted four times a year to maintain a specified spread
to Treasury yields. This new approach can provide an
inflation hedge when interest rates are changing rapidly.
TAX-EXEMPT MONEY MARKET PREFERREDS
Another high quality short-term alternative that corporations
use is tax-exempt money market preferred stock, which is
the preferred stock issued by closed end municipal funds
traded on the New York Stock Exchange. Although it is a
form of equity, tax-exempt money market preferreds are
similar to debt in that the dividend rate is fixed like a coupon
for a specified time period (seven days). You receive your
dividend at the end of each 7-day period. The dividends are
reset through a re-marketing process that is designed to
allow the security to trade at par. The dividend rates will
reflect current short-term market conditions. These securities
are typically rated AAA by Moody’s and Standard &
Poor’s. Both require that the funds pass frequent tests to
prove that there are more than $2 of assets in the portfolio
collateralizing every $1 of preferred stock outstanding. The
Investment Company Act of 1940 requires that minimum
two-to-one ratio. Tax-exempt money market preferred are
offered with a minimum purchase amount of $25,000 and
in increments of $25,000.
PIPER JAFFRAY MONEY MARKET MONITOR
In order to help you keep track of rates on these short-term
alternatives, Piper Jaffray created Money Market Monitor,
which shows an indication of yields for most of the investments
mentioned above. It features a variety of alternatives with
maturities from 30 days to 3 years. It is an easy way to stay
on top of short-term yields in an ever-changing interest rate
environment. It quickly shows you which of the investments
will meet the needs for your corporate cash. Ask your
Piper Jaffray financial advisor for a copy of our most recent
Money Market Monitor.
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Corporate Cash Management Techniques
PIPER JAFFRAY CAN GUIDE YOU
The effective management of corporate cash is an all too
often neglected area. At Piper Jaffray, we cater to firms like
yours. We’ve been assisting business clients since 1895.
Whatever goals you may have for the growth of your
company, your Piper Jaffray financial advisor can review
the cash management alternatives available to help
maximize your profitability and minimize your taxes
without unnecessary risks. We can show you how we can
help you better achieve your corporate goals through:
• Prudent investment advice
• Ongoing attention and service
• Concern for what matters to you as a business leader,
whether that means your personal portfolio or your
business assets
Piper Jaffray does not provide legal or tax advice.
Since 1895. Member SIPC and NYSE.
©2004 Piper Jaffray & Co. 10/05 PC-04-1877 piperjaffray.com
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