Managing Cash Reserves

The main question is where to place the funds. Operating balances should remain highly liquid to cover daily expenses, reserve balances should be positioned for security and accessibility, and strategic balances should be invested wisely to generate growth.

Let’s explore how to allocate these funds effectively.

The importance of liquidity

This is about your ability to access cash quickly to meet financial obligations. Having strong liquidity means you can manage day-to-day operations, handle unexpected expenses, and seize opportunities as they arise.

High liquidity offers several advantages:

• Unexpected events, such as delayed payments from customers or economic downturns, can strain cash flow. Businesses with accessible cash reserves can meet these challenges with confidence.
• Taking advantage of opportunities, whether it’s securing supplier discounts, expanding into new markets, or investing in innovation. Having available funds means you can act swiftly.
• Market fluctuations, interest rate changes, and economic shifts can create financial instability. Maintaining liquidity minimizes reliance on credit, reducing exposure to rising interest rates and financial stress.

However, liquidity comes with an opportunity cost. Keeping too much cash in low-yield accounts means missing out on potential earnings. The key is to strike a balance between maintaining liquidity and making your money work for you.

Allocating business deposits effectively

A strategic approach to deposit management involves segmenting cash into three primary categories: operating balances, reserve balances, and strategic balances. Each category serves a different purpose and should be placed in appropriate accounts to maximize efficiency and returns.

1. Operating Balances

These cover essential expenses like payroll, rent, and supplier payments. The funds should remain highly accessible with:

• Business checking accounts, as these allow immediate access to funds with features like cash flow forecasting and automated payments.
• Interest-bearing checking accounts, which offer a small return on cash while maintaining liquidity.

Best practice: Keep enough in checking accounts for near-term expenses while allocating excess to higher-yielding accounts.

2. Reserve Balances

These act as a financial cushion for unexpected expenses or revenue disruptions. You should aim to cover three to six months of operating costs with:

• Business savings accounts, which provide liquidity with interest earnings.
• Money Market Accounts (MMAs), which offer higher interest rates while maintaining accessibility.
• Short-term Certificates of Deposit (CDs), which provide better interest rates if funds can be set aside for a fixed term.

3. Strategic Balances

These consist of excess funds that can be placed in higher-yielding investments for potential growth, such as:

• Treasury Bills (T-Bills), which are secure, liquid government-backed investments.
• Business investment accounts, such as diversified portfolios that balance risk and returns.
• Laddered CDs, which are staggered maturity CDs provide better yields while ensuring periodic liquidity.
• Commercial money market funds, which involves investing in high-quality short-term securities for accessibility and return.

Best practice: Work with financial professionals to develop an investment strategy aligned with risk tolerance and growth goals.

Improving liquidity through smart financial management

You can optimize cash flow by implementing just-in-time (JIT) inventory practices to prevent excess stock from tying up funds. Leasing instead of buying equipment and real estate helps preserve liquidity and offers financial flexibility. Additionally, selling or leasing underutilized assets can generate extra cash flow.

Improving payment terms also plays a critical role. Negotiating longer supplier payment terms while accelerating receivables can increase cash availability. You should also leverage banking tools for automating payments, forecasting cash flow, and managing working capital more efficiently.

The role of a trusted partner

Partnering with a credit union that understands your business’s financial needs is crucial. Community First business banking solutions are designed to help you improve efficiency, security, and cash flow visibility. We can help you accelerate incoming payments through digital invoicing, lockbox services, and remote deposit capture. Our automated disbursement tools, ACH payments, and fraud protection measures streamline outgoing transactions while safeguarding against financial risks.

Next steps

• Review your current operating, reserve, and strategic balances so that they align with your liquidity needs and long-term financial goals.
• Explore higher-yielding options like money market accounts, laddered CDs, or Treasury Bills to generate returns on funds not needed for immediate expenses.
• Implement strategies such as optimizing inventory, negotiating better payment terms, and leveraging banking tools to improve liquidity and working capital management.
• Work with us to take advantage of solutions that streamline receivables, payables, and financial reporting to strengthen your deposit strategy.

Now more than ever, you must be proactive in managing your deposits. Keeping operating balances in accessible accounts, maintaining reserves for stability, and investing strategic balances for growth is key to a well-rounded financial strategy.

We are here to support you with customized financial solutions. Contact us today to discuss how we can help you manage your business deposits effectively and navigate today’s economic landscape with confidence.

*These resources are guides only and should neither replace competent advice, nor be taken or relied upon as financial or professional advice.