Managing Short-Term Cash Surpluses

What are you doing with your company’s short-term cash balances?

These are funds that aren’t needed for payroll, taxes, rent, utilities, supplies, or other regular operations, but have also not been tagged for equipment or other capital expenditures. Depending on the size of your company and where you are in your receivables and payables cycles, you may have a few hundred or a few thousand dollars sitting idly at your bank. That’s not effective cash management.

If you consistently find that there are significant balances in your corporate accounts, you need to explore options for putting that money to work. You should always consult your CPA or investment advisor to discuss what’s most suitable for your company, but the options outlined below can help get the conversation started.

Sweep Accounts

Sweep Accounts are available at most commercial banks, and many offer special arrangements for growing businesses. At the end of every business day, extra cash above a specified balance is automatically transferred into an interest-earning account. The money remains invested until it is needed in the checking account, when it is transferred or “swept” back to maintain the pre-established balance.

Benefits of sweep accounts include easy set-up, liquidity, automatic transfers, coverage of disbursements to avoid overdrafts, and investment in very low-risk instruments. In some situations, you can minimize your company’s interest expense by having your excess funds “swept” toward paying down your line of credit.

The problem with sweep accounts, as you may have figured, is that your return is based on market rates for very short-term investments. In fact, today’s rates are at historic lows. This might be a time to consider chipping away at balances on lines of credit, as mentioned before.

Some banks offer various options for sweep account investments that can bring a marginally better yield. But overall, the current interest rate environment dictates that sweep accounts offer convenience, liquidity and relative safety, but not substantial returns. Discuss this with your advisor.

Certificates of Deposit

For money you can afford to tie up for a few months or more, you can consider certificates of deposit. CDs have maturities usually ranging from three months to five years. Historically, longer maturities have offered higher yields. But again, rates are low and the current “yield curve” is relatively flat. You should know too, that cashing-out early can result in the bank charging you a penalty. These penalties vary, depending on the bank you’re dealing with.

One option to discuss with your financial advisor is constructing a “CD ladder.” Laddering involves putting cash in CDs of varying maturities. This should allow you to benefit from the most attractive current yields, but will also give you enough flexibility to grab better rates in the future. When interest rates eventually rise, you can reinvest the cash from shorter-term CDs to take advantage of higher yields.

However you decide to invest your short-term cash surpluses, MP Star Financial’s invoice factoring services can help get funds to your account faster. Don’t wait 30 to 45 days for payment! Call MP Star Financial for more information at (800) 833-3765, extension 150.

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