Many companies have come out of the pandemic/inflation/Fed counterattack in a great position with more cash on their balance sheets than they expected, or needed, to run their business effectively. For some, that comfort has led to complacency, letting the cash sit in their business checking accounts ready on demand for any new venture, or just in case a surprise tornado takes off the roof, or to make their bankers happy, or whatever.

I believe that this is a management error and I’d like to address it in today’s post. 

We all need enough cash in our checking accounts to pay the expenses of running a business, both today’s expenses and those expected in the weeks and months ahead. Anything less is irresponsible or a sign of a troubled company. But leaving more cash than is needed in accounts that pay no return to the company is not good business. It’s simply passing up an opportunity to earn more money for the business. 

Why would you do that? Would you lower your prices in order to reduce your income? Would you absorb today’s cost increases over so many areas of the economy without attempting to recover those costs through greater efficiency, better buying habits, or passing them through to your customers? Probably not. But letting unneeded cash sit idle is another, albeit less obvious, way to lower your company’s profits. 

When interest rates were near zero and interest-earning accounts were being paid .01% interest – yes, we had a few of those – it really didn’t matter much. But with today’s rapidly rising rates, even if the sharpness of the raises is likely to abate soon, it’s a different matter. Credible financial institutions are paying dividend rates of 3%, 4%, and sometimes more, in fully insured accounts, for the opportunity to use your unneeded cash to run their businesses. Why would you not take advantage of that? And, if your bank is unwilling to meet the market for interest-bearing deposits, its competitors are eager for the opportunity. Not a reflection of your bank’s disinterest in having you as a customer, it’s just business. 

One caveat remains, however. You need to know with pretty high certainty how much cash you need to run the business and pay all bills when they come due, today and into the future. How far into the future? That clearly depends on the nature of your business, but if your investment vehicle of choice is a fixed-term deposit, e.g. CDs, you need to be clear that you’re covered without needing those funds until their term expires because the cost of early withdrawal is usually high enough to void most of the benefit of the investment. That means having a reliable cash forecast that projects through the term of any such term deposits. And if your forecasting is flawed, your effective use of excess cash to earn additional profits becomes a gamble and a guess. Not good management. 

So, is your cash forecasting reliable, regularly updated, and actively watched? If the answer is yes, what are you waiting for? If your answer is anything other than yes, you need help. Do we provide that kind of help? Of course!

We are Your CFO for Rent.