Maximizing the value of your firm’s cash

Whether your business is accumulating cash through the process of regular operations or through funding or grants, you should be taking steps to execute smart cash management to safeguard your company from future obstacles.

It’s easy to figure out how much cash is on hand at any given time, but understanding how much can be locked away versus how much needs to be immediately available for operating purposes is trickier. However, there are options available for you to make the most of the money that your business holds without the headache of worrying about illiquidity.

Whether it’s operational or idle cash, your business should be putting that money to work, and choosing where to invest that money depends on a few distinct factors.

Interest rate risk

Typically expressed as an APY (annual percentage yield), the interest rate tells you how much an investment will earn per year. A typical personal savings account, for instance, will today yield around 0.40% APY, while a money market fund will return up to 4%. These rates fluctuate with the economic cycle and vary among account providers and deposit amounts.

When possible, businesses with idle cash should consider investing for higher yield. Holding cash is not risk-free and, in fact, it is guaranteed to suffer from inflation, whether low or high. Government Treasuries or highly-rated investment grade bonds are relatively safe investments, and some currently offer attractive yields. However, even T-bills and corporate bonds can suffer substantial volatility during turbulent times. The rapid increase of the federal funds rate led to 2022 being the worst year in history for US bonds, and contributed greatly to Silicon Valley Bank’s collapse.

Institutional risk

Beware of putting all your eggs in one basket, as the rapid failures of Silicon Valley Bank and Signature Bank have demonstrated. While bank deposits in the US are covered by federal deposit insurance up to $250,000, avoid a situation in which funds get tied up for a longer period in a shaky financial institution. It is somewhat unrealistic for depositors to critically analyze bank balance sheets, but diversification can help, and ideally, a large balance at any institution is coupled with risk analysis conducted by a competent party. The Federal Reserve conducts annual Dodd-Frank Act stress tests, though these currently exclude all but the largest banks from certain key requirements.

Depositors can diversify institutional risk by having relationships with multiple financial institutions and keeping enough liquidity in each to cover at least a few payroll and opex cycles. While this segmentation of cash may make a business slightly less attractive to a given bank and might reduce negotiating leverage when discussing loans or lines of credit, a CFO must tread the fine line between the company being attractive to lending institutions and reducing cash management risk by avoiding a single point of failure.

Investment risk

Very few businesses invest significantly in equities because businesses outside of the investment industry exist to create and sell their products and services, not to run investment schemes of any sort.

Businesses should primarily deploy cash for operating purposes, and investments in financial instruments must be limited and monitored. The CFO should also consider adverse scenarios that could result in a capital loss on existing investments, and evaluate whether the startup still has adequate cash to cover operations and necessary capital expenditures. A weakening balance sheet has many potential negative consequences, including loss of investor confidence and a weaker negotiating position for future capital raises.

Liquidity risk

At every stage of your company’s life cycle, from early startup to multi-national corporation, liquidity is critical. Unfortunately, this is also the most overlooked factor, and lessons are learned the hard—and costly—way.

Money market accounts have an attractive headline APY, but to actually get access to that money requires a lead time of at least a few business days, if not more. This might not matter to some businesses, but it's the rare company that doesn't occasionally need a rushed infusion of cash (say, to take advantage of an unexpected market opportunity or to negotiate a new contract with a vendor), and for that purpose, a money market account might be less than ideal. Investing in government securities, depending on the particular form, may also lock up money for weeks or months.

Despite the perceived safety and attractive yield, early or untimely redemptions of money market instruments and government securities may result in a loss of principal, and understanding the underlying risks in detail requires experience and detailed reading of the associated prospectuses.

When choosing a cash management institution, businesses should evaluate risk from four perspectives: rates, underlying institutions, investments, and liquidity. The Mayfair high-yield cash account is built by former finance professionals who spent many years pricing risk. It is highly liquid, allowing companies to withdraw money at any time. Funds are placed with robust banks, and never invested in products that eke out additional yield but are subject to investment risk, however small. And there is no need to make a tradeoff for rates, with the ability to earn up to 4.42%* APY—making it a win-win for you and your business.

‍* For more information on the current annual percentage yield (APY) for Mayfair’s cash account products, please visit getmayfair.com and read our disclaimers and terms of service.