When most business owners address the issue of managing company’s 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 Investing Strategies for Short-Term Cash
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.
Matching Investing Strategies for Short-Term Cash
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:
Go to the article: Strategies for Managing Your Company’s Cash
