Cash flow is the lifeblood of any business. Balancing income with expenses, investing money back in the business, using smart financing to grow and understanding how much cash you need to keep on hand and in reserve are key components of its success.
Just how much cash to keep in reserve is a delicate balance that should be positively influenced by where it’s kept.
Decide how liquid your money should remain
Some of the best places to hold reserve money that needs to be accessed quickly include:
- savings accounts, which often offer the lowest interest rate but highest liquidity,
- money markets, which typically have higher interest rates over savings accounts but slightly less liquidity, and
- short-term or laddered certificates of deposit, which usually offer the best interest rates out of these three options but the least amount of liquidity, depending on the specific length of the CD purchased.
Where you decide to put the cash reserves will determine the interest rate, risks and variables that influence liquidity of your money. Deciding how accessible your cash reserves need to be for your business will help you narrow down the best option, and determine if one of these solutions meet your needs or if you should look beyond these three products.
Fully understanding a product before you commit is important; decide liquidity first, then match available places to hold your money to those requirements.
If you aren’t sure, consider speaking with a commercial banker with robust experience in operations and cash flow. Their expertise can be invaluable!
Consider a money market account.
Money markets are a popular place to save money because it’s very accessible. They’re very similar to a checking account, but often come with a better interest rate. Restrictions do apply, though, such as a limited number of transactions per month without penalty, and a minimum balance to avoid monthly fees.
If a business isn’t worried about accessing the money occasionally, then a CD might provide higher interest rates.
Using a CD? Keep an eye on its length and penalties.
Certificates of Deposit and offer great rates on them, but it’s important to match the term of the CD to your potential cash flow needs. Penalties apply for removing your money before the term ends, and the fees can offset the income you’ve earned.
Click here to learn more about CDS, including a ladder strategy that can be ideal for cash flow needs.
Talking about where to put the cash reserves for a business begs the question of “how much do we need?” We recommend taking a look at your history of cash flow, then saving the equivalent of 3-6 months of monthly expenses using an average from the last twelve months.
Maintaining an open line of credit is also a smart buffer to have, even for companies with ample cash reserves. These combined can protect a business from slow accounts receivables, shortfalls in payroll and other potentially disastrous scenarios, and help the business take advantage of short-term opportunities without depleting its reserves.
To learn more about cash flow and building or maintaining a cash reserve for your business, Horizon Community Bank is here to help. Contact us today at the branch nearest you to schedule an appointment.