What should online stores do with idle cash?

December 20, 2022

With a record $11.3bn spent on Black Friday and Cyber Monday, most ecommerce firms enjoyed sizable profits during an unexpectedly strong start to the 2022 shopping season.

But now what?

The flipside to record spending is record inflation— it's the caveat to many sales figures and the worry of business owners going into winter with cash reserves in accounts with low or near-zero yields.

Successful stores adapt to the cyclical nature of retail, but few have the power to reduce inflation's effects beyond raising prices and buying inventory early and often. Ecommerce stores, with their rapid sales cycles and less-predictable inventory purchase periods, can't always or may not want to resort to these methods.

In your personal finances, you'd simply find a high-yield savings account where your cash could earn some interest and you could quickly withdraw it—potentially even a higher-yield option, like treasury bills or certificates of deposit (CDs), if you knew you wouldn't need cash immediately.

But what do businesses do? Especially ecommerce stores who will want cash quickly, often with little advance notice?

The good news is that there are several smart, safe ways to earn yield on your cash while keeping it accessible, too.

Deciding how much cash should stay in your operating account

Before we discuss places to earn interest on excess cash, it's critical to define how much you should have immediately accessible in your checking account at all times. Your operating account shouldn’t be allowed to dip below this number for longer than it takes to transfer money back into it.

In our experience, store owners should have a minimum of three months of overhead expenses immediately available to them. The amount is ultimately up to you as the owner, but three times your current monthly outflow gives you ample insurance against unexpected expenses.

Once you've identified the amount you want to keep, you'll need to answer a few questions about any instrument you're considering as an investment product.

Four things to think about

What's the rate I receive? Rate is how much you'll receive on your cash over time. Usually, you'll see this as annual percent yield (APY): how much your cash earns in a year, including compound interest. It may be useful to divide this number by twelve to give you an idea of how much yield you can expect on a monthly basis, since you're unlikely to keep cash tied up in an account for the full year.

How much risk do I incur? Risk includes not just the possibility of an investment losing value ("price risk"), but also less obvious hazards such as loss of access to funds due to financial stress or volatility ("credit risk").

How liquid is the instrument? Liquidity is how quickly you can access your money under its terms. Most traditional banking products, like checking accounts, offer immediate liquidity. But some instruments require you to wait, pay fees, or sell the instrument at a loss to get your cash back if you want it sooner than you initially agreed to.

How much effort does this instrument require? Effort is how involved you need to be for your cash to hold or increase its value. Banks, for instance, pay you interest automatically. Other instruments aren’t so easy and require extensive management, knowledge, or infrastructure to maximize value.

Let's see how the most common “cash safe harbors” stack up.

Rates are current as of March 27, 2023.

Checking and savings accounts at a traditional bank are the default place to park your cash. They offer instant liquidity and are risk and maintenance-free. Their only drawback is low interest rates, even when average rates are high.

Neobanks are firms that build software offerings atop a traditional bank. This software “wrapper” emphasizes ease-of-use and digitally-facilitated services that can be more convenient than a traditional banking experience. But since they're working with a traditional bank, their business and checking accounts are fundamentally the same. You'll often “pay” for the useful platform by forgoing some or all yield on business checking or savings accounts.

A money market account (MMA) offers relatively high yields and even qualifies for FDIC insurance. The downside is that they can make you wait up to seven days for your cash.

Lastly: money market funds (MMFs), like those offered by Brex and Mercury, are common alternatives to MMAs given their reputation for cash-like stability and frequently better yields. The reputation isn't entirely deserved, though. MMFs are inherently investment vehicles, which means the prices of the underlying assets can drop, and customer withdrawals can only be satisfied through asset sales—which, on their own, can lead to loss of value in times of stress. As a result, in times of market volatility, MMFs are liable to “runs,” something that occurred as recently as 2020.

What ecommerce stores should do with idle cash

The “ideal solution” hinges on how much an owner prioritizes each of the four criteria mentioned earlier: high rates, low risk, high liquidity, low effort. There is no perfect instrument that’s best-in-class for all four, but that doesn’t mean you have to get just one.

You should, however, know which one you prioritize—and we believe ecommerce stores should put a premium on high liquidity and minimizing risk.

Investment-based instruments like money market funds can freeze at the worst possible times for your business. Even money market accounts with a bank, while immune to market risk, can take days to transfer back into your operating account.

Our own preference for high liquidity and low risk informed how we designed the Mayfair high-yield cash account. We built it for liquidity—you can withdraw your money at any time in any amount with one-day transfers that take only seconds to initiate. And because your funds are held in a cash deposit with an FDIC-insured bank, they are eligible for FDIC pass-through insurance.

On top of that, we offer the highest APY available for cash accounts, plus an automated solution that takes the busywork out of making sure your operating account always has enough cash for your regular expenses.

If you're an ecommerce store owner looking to earn more on your income while keeping it liquid and safe, a Mayfair cash account may be the solution.

Interested in learning more about cash management and our solution?