Corporate cash management: Ideas to make your money work harder

The widespread disruption to the country’s supply chain has, perhaps unsurprisingly, impacted cash flow for many businesses, but not in the way one might expect. Rather than suffering from a lack of available cash on hand, some companies are experiencing the opposite: they have excess cash in the bank.

For example, a manufacturer that’s purchased inventory but must wait six months for it to arrive may experience a lag in cash flow before it receives the raw materials and can turn them into finished goods.

On the contrary, resellers that can’t even buy products to sell — like retail stores and car dealerships — may have liquid assets sitting in accounts just waiting for an opportunity to restock inventory.

Excess cash is a conundrum we don’t often deal with. Now may be a good time to explore some alternative uses for those funds to improve your financial return until the supply chain issues are resolved, and business activity returns to some semblance of normalcy.

Where to start

The key to a quality alternative for your excess cash should involve a solution that:

  • Provides a better return than your existing situation;
  • Minimizes risk, since this is likely a temporary shift; and
  • Considers both the current environment and informed predictions for the near future.

Let’s be clear: excess cash is not a license to take bigger risks. If the pandemic economy has taught us anything, it’s to be prepared for sudden, unexpected changes.

With that in mind, a good rule of thumb before considering any of the options below is to hold enough cash in a traditional deposit account to cover at least six months of business operations.

You should also consult with your accountant and your business banker to ensure adequate cash flow for your specific situation and unique needs. Every industry, company, and market requires an individual review. The following information is broadly applicable and meant only to spur ideas and provide you with a new way of thinking about your options.

Creative cash management

Economic indicators suggest that interest rates may continue to rise over the coming months. However, rates are still historically low, and with the unusual economic activity over the last few years, interest rates are somewhat uncertain.

In an uncertain rate environment, consider some of the following treasury management techniques for using your existing resource — excess cash — to generate new potential sources of income or savings:

  • Pay down debt. Not all debt is created equal, so talk to your banker about which credit obligations might be most advantageous to chip away at. For instance, if you’re paying more interest on your building mortgage than you are making on your interest income, then paying down that debt would be a net gain.
  • Take advantage of trade discounts. If you make purchases from a supplier that offers trade terms, such as a 2% discount for payments made within 10 days or the full amount due in 30 days (2/10, net 30), you’re paying annualized interest of over 36% if you’re not taking advantage of the discount. While remaining mindful of monthly cash needs, taking advantage of trade discounts is a great way to use your excess cash effectively.
  • Eliminate service charges or fees. Do any of your accounts require a minimum balance to avoid a fee or service charge? Talk to your banker to analyze your full banking relationship and make sure your money is spread appropriately to avoid unnecessary fees.
  • Consider capital expenditures. Making capital purchases with excess cash could save money by allowing your business to lower taxable income through increased deductions. The decision to purchase land, physical space (e.g., a building), or equipment should be made with an eye to the business plan and after consultation with your banker and accountant.
  • Look into staggered maturity CDs. If you don’t need all your available cash immediately, opening a certificate-of-deposit account (CD) could help you make more interest income. CDs enable you to lock in an interest rate for a specified term; the downside is, it’s more difficult to access those funds if you need them. So, a popular strategy is to “ladder,” or stagger, the terms of maturity, rather than lock down all your cash at once. Your business banker can provide more details.
  • Explore alternative investments. Perhaps now is the time to establish and fund a retirement plan or investigate tax-advantaged investments that could provide higher yields. Timing and diversification can make a difference for these opportunities, so we recommend you talk to your financial partner.

In truth, the possibilities are endless. If you have an idea you’d like feedback on or want more information about how to initiate one of the options above, reach out to your team of trusted advisors and partners.

Your ongoing success impacts the economic health of our entire community. We’re here to lend support and guidance. We might also be more attuned to economic indicators that could help you forecast your needs and weigh the risks against the benefits of any cash-management strategy.

Sam Huntington is senior vice president – Treasury Management director at State Bank of Cross Plains. SBCP’s Treasury Management helps businesses with deposit accounts, online services, business cards and payments, cash management, investment accounts, fraud protection, and international banking.

Click here to sign up for the free IB Ezine — your twice-weekly resource for local business news, analysis, voices, and the names you need to know. If you are not already a subscriber to In Business magazine, be sure to sign up for our monthly print edition here.