When most business owners address the issue of managing company cash, it usually revolves around contingency planning in case there isn’t enough money to cover monthly expenses.  That type of cash problem can quickly put you out of business if it isn’t resolved.  But that isn’t the only important issue involving cash.  At the opposite end of the spectrum, business owners need to consider what to do with their short-term cash balances.  Having extra cash is good, but many business owners simply don’t make the best use of this money.

Investing Your Company’s Short-Term Cash

There are different approaches to investing your company’s short-term cash.  Your company is not an investment fund, so the strategy isn’t simply maximizing return.  Managing cash needs to be considered as part of your overall company’s strategy.  This means making sure that the money is available to pay bills as they come due.  That is the priority.  Taking unnecessary risks with your company’s short term cash – in the hopes of securing higher returns – is not prudent. 

Prudent cash management strategies can be organized into several categories:

Passive strategies don’t involve active monitoring.  They involve identifying safe, highly liquid investments such as company checking accounts that pay interest, money market funds and short-term certificates of deposit.  If your small business has a significant amount of cash that goes beyond the standard protections of FDIC-insured limits, you can consider these strategies that I wrote about earlier this year.

A matching investing strategy is also based on finding safe, liquid investments for your company’s cash.  But in an attempt to maximize the yield earned on your company’s cash, you “match” the timing of the maturity of the investments with your company’s cash needs.  Since most investments have a direct relationship between yield and time to maturity, the longer you are willing to have your company’s cash locked into an investment the higher the yield.

As an example, let’s assume that your company currently has a zero cash balance at the beginning of the period and that over the next 6 months your company will have the following cash inflows and outflows:

If using a passive strategy, a company could just leave the money in a checking account without concern for yield.  However, with a matching strategy you would keep the cash invested as long as possible in order to maximize the return on the money, ensuring that the investments would yield sufficient cash to “match” your anticipated cash needs.  In case of significant surprises, the investments selected in a matching strategy should also be liquid.

For this example, the company could invest $50,000 of the month one surplus for three months and $100,000 of that surplus for four months, maximizing the yield earned on that money.  The surplus from the second month could be invested for four months.  The third month surplus would be split into a $50,000 investment for three months and $100,000 for an additional term beyond the scope of this example.

Is it Worth It?

Interest rates are painfully low and the yield curve is relatively flat.  When yield curves are “flatter”, the additional compensation earned by investors (in the form of higher interest rates) for accepting longer investment periods is small.  In other words, the additional interest earned on a 6 month investment vs. a 3 month investment vs. a 1 month investment add up to only a few basis points, which don’t translate too much in dollar terms.  But as interest rates rise, which they almost certainly will, this will change.  Starting now will position your company to maximize its return on cash as this change takes effect.  Additionally, it is always a good business practice to maximize the return on your assets.  Finally, if you are already doing everything you can realistically do to increase profitability, taking some time to implement this strategy certainly won’t hurt.