Managing Small Business Finances When You Have Cash In the Bank
There are hundreds of posts on how to manage your business when cash is tight and reserves are low. But for some business owners, another pressing problem is knowing what to do with the money after the tide turns and you have cash in the bank.
For some owners this may be hard to imagine. But as your business scales you will of course have larger volumes of money moving through your company. If you’re profitable and focused on building reserves, then you’ll need a plan to manage those funds too.
Thankfully, having an excess of cash in the bank is a high quality problem – a GOOD problem to have. Even so, it can be stressful to figure out what the right choice is for your money.
Here are three options you can consider for managing the money you’ve currently got sitting in your bank account.
To kick things off, let’s address the elephant in the room because many business owners don’t know the answer to this one...
When it comes to managing small business finances, how much money is too much money to have in your account?
It may seem like the answer should be, “You can never have too much cash.”
And while it’s true that you can keep stockpiling more money, the standard limit for deposit insurance on the total held in any one bank is $250,000.
When the total of your business bank accounts added together are routinely above the amount of cash you need to operate the business week by week; or the total of your business bank accounts added together are routinely over $250,000, it’s time to start consider new options for cash management for your business accounts. After all, interest rates are rising and there are many banks that are offering great rates.
So, if you have more than you need to cover one month’s operations, you can move some of your funds to accounts with better interest rates, so that you can actually make money on the cash you have. And while you are doing so, you’ll also be offsetting the risk of keeping all your accounts in one bank.
Option 1 for Moving Your Money: High Yield Savings Accounts
One of the best things about managing small business finances with high yield savings accounts is that you get to directly control where your money is going. You can ensure that your money is at banks that align with the values of your business. Because, the truth is, not all banks are created equal when it comes to how they invest your money!
Click here for more insight on banks and choosing the best one for your small business.
One of my clients chose to use a high yield account with an interest rate that comes closest to the interest they are paying on their largest loans. Eventually, they are planning to use these funds for growth, but the exact details of that plan are still evolving.
In the meantime, having their cash in an account that earns as much as (or more than) the interest of their largest loan essentially means that keeping this capital for eventual growth (rather than paying off more of the loan now) is cost neutral.
When it comes to choosing high yield savings accounts for your business, I recommend you explore Live Oak Bank or Grasshopper as options. For more recommendations that are vetted and continually updated, you can also check out the Best Business Savings Accounts from NerdWallet.
Here are the Pros & Cons of High Yield Savings as the Solution for Managing Small Business Finances When You’ve Got Cash to Spare:
The Pros
You have complete control over where your money goes.
You can shop around for the best interest rates and other services.
The Cons
Managing your money falls completely on your shoulders.
Option 2: Set Up a Cash Sweep Account
An Insured Cash Sweep (ICS) — also commonly referred to as a “sweep account” — is a service provided by your bank that moves money from your account over a certain amount to demand deposit accounts or money market deposit accounts at other ICS Network banks. The threshold you set can be $250K or higher, depending on your cash needs.
Sweep accounts are secure and protected by the FDIC, so you know your money is safe when it is moved from your account.
One of my clients used this option when they had raised a large amount of cash.. They moved excess cash through their Sweep Accounts. Their bank, Amalgamated Bank, is a B Corp and agreed to place their cash with banks that fit their values and criteria.
Here are the Pros & Cons of Choosing an ISC as Your Solution:
The Pros
Simple, safe, and straightforward
The Cons
You don’t control what banks your money goes to.
You may or may not get the highest interest rate.
Option 3: Open an investment account and get an investment advisor
If you want to make the most money from your extra cash in the bank, opening an investment account and getting the advice of an investment advisor may be your best bet.
With an investment account your excess cash could be invested in stock or bond portfolios or even in real estate or other asset classes. Of course, these types of investment also carry the risk of loss. So while the possibility of increased earnings may be attractive its always wise to consult with a financial advisor, especially as you’re managing larger sums of money.
Here are the Pros & Cons of Choosing an Investment Account and Advisor
The Pros
You have the possibility of increased earnings via investment in stocks or funds.
You get to choose your advisor and can ensure they know your values and will invest your money accordingly.
The Cons
This option is more complex and has higher risk.
You could potentially lose capital if your investments go down in value.
Need more support with managing your small business finances?
Check out our Full Service CFO program and then get on my calendar for a free 30-minute conversation so we can talk.
The focus of the conversation will be on your business, the challenges that are top of mind for you, and the actions you can or should be taking. But we'll also talk about how CFO on Speed Dial helps companies like yours gain stability and resilience in a crazy and unpredictable world.