Putting cash in a bank account keeps it safe. It can be retrieved easily and quickly. But cash in a bank account earns hardly any interest. A cash-flow management technique that employs other types of investments can, however, help increase business income from cash without undue risk or inconvenience.

Boosting income from cash is well-worth the effort, says Alex Shvarts, chief technical officer at FundKite, a New York City-based small-business funding platform.

“A better return from short-term cash instruments can add to the bottom line," Shvarts says.

Unfortunately, few business owners consider the possibility, says Loreen Gilbert, president of WealthWise Financial Services, a financial planning firm in Irvine, California.

“They're so busy running their business and making sure they have enough cash for expenses like payroll that they don't think about it," she says.

Even smaller businesses may accumulate sizable sums for equipment purchases, retirement plan contributions and other expenses, Gilbert notes.

“Some may have hundreds of thousands of dollars floating that they could do something with," she says.

Hefty account balances generate limited cash when the average interest checking accounts offer just 0.06 annual percentage yields, according to the Federal Deposit Insurance Corp.

But higher returns are available if business owners apply cash-flow management techniques with care and creativity.

Rules of Investing for Cash

When seeking to earn income from extra cash, a business has to keep sufficient cash in safe, easy-to-access accounts to cover current and anticipated cash needs. Bank accounts offer adequate liquidity and safety for this purpose, at the cost of low returns.

“The least liquid investments usually yield the greatest returns, but you need readily available cash to run any business," Shvarts says. “The key is being able to accurately forecast your profitability going forward minus extraordinary expenses so that your reserves will always cover your working capital."

As long as business liquidity needs and an owner's personal risk tolerance are carefully considered, a company's cash can be safely and profitably deployed out of low-paying bank accounts. 

With that in mind, applying cash-flow management techniques to increase investment returns starts with a careful study of current resources and future needs.

“The first step is to do a cash-flow analysis with their bookkeeper to see what their cash-flow needs are on a month-to-month basis," Gilbert says.

Cash-Flow Management Techniques For Investors

Excess funds can go into a corporate investment account managed to produce more income.

One investment account to consider is a sweep account. Sweep accounts automatically take any amount above a preset balance and transfer it to an investment paying higher interest at the close of each day.

“Sweep accounts, an excellent example of how modern technology and algorithms make banking easier than ever, are a great way to automatically invest any excess profit at the end of a business day," Shvarts says.

Low-risk money market funds, some of which currently pay interest rates as high as 2 percent, are popular choices for cash transferred from a sweep account.

Another way to handle excess cash is an ultra short-term bond fund.

“That's completely liquid, but is still going to pay more than that bank account," Gilbert says.

However, net asset values of mutual funds can vary, and bond values decline when interest rates rise. So bond fund investments carry the risk of losing money when interest rates are rising.

Buying the actual bonds—rather than shares of a bond fund—is one of the cash-flow management techniques that avoids this risk. When held to maturity, bonds pay holders the full face value. On the downside, a bond holder who needs cash and has to sell the bond before maturity may receive less than they paid.

To blend liquidity with safety, Gilbert sometimes recommends municipal bond ladders. These consist of individual tax-advantaged bonds with maturity dates of one to several years.

“That is a great strategy if you have money and can hold those bonds," Gilbert says.

Another option is a structured note. These combine a bond with a derivative such as a futures contract on a stock index like the S&P 500. Structured notes may pair higher returns with managed downside risk.

“With a structured note we can also work around a term," Gilbert adds. “We can do three, four or five years."

What if your business has funds it won't need for more than several years? You can put them into an investment portfolio that includes a moderate allocation of stocks. Stocks and stock mutual funds are liquid and can yield good returns. But stock values can fluctuate significantly, so the risk is higher.

“For those clients that are okay with that concept, in other words they don't need it for cash-flow purposes but they don't want to take it out of the business and move it to personal, we can invest at a moderate allocation in the market," Gilbert says.

As long as business liquidity needs and an owner's personal risk tolerance are carefully considered, a company's cash can be safely and profitably deployed out of low-paying bank accounts. Readily available market information and technology like sweep accounts and apps that automate investing put greater returns on cash within the reach of many more businesses, Shvarts says.

“Recognizing trends such as rising interest rates is easier than ever," Shvarts says. "You don't have to be an accountant or financial advisor to make smart choices with money, as a lot of what business owners need to know is available online."

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