Questions Regarding Cash Management in the Current Market Environment

With the recent takeover of two regional banks by the FDIC, and other regional banks under pressure to show that their customers' deposits are safe, we have received numerous questions from business owners regarding their cash management. 

(Please note that as of this writing, Federal regulators have guaranteed that depositors in these failed banks will receive 100% of their deposits regardless of the $250,000 FDIC limit.) 

The first item to think about is laying out a timeline of how cash is to be used in the business.  A common way to look at this is using the following timeframes:

  • Cash that is going to leave the business in the short-term (less than 30 days) should be held in cash at a bank ready to be dispersed.  The FDIC insurance coverage guarantees deposits up to $250,000.  It is not uncommon to have cash at multiple banks to ensure that the amount does not exceed this guarantee.  
  • Cash that is going to stay in the business for greater than 30 days, but less than 3 months, has additional investment options.  Money market funds are a great way to generate a reasonable level of interest on your cash.  Money market funds are a mutual fund that invests solely in cash and cash equivalent securities.  These investments are very liquid, short-term investments that are of the highest credit quality.  After an era of low rates in the debt market, the Federal Reserve has raised short-term interest rates over the past two years to allow these money market funds to provide greater rates of return at very low risk to the investor.  Many Money Market funds as of 3/16/2023 are yielding over 4% annually.  These yields are adjusted weekly depending on the performance of the underlying investments held in the fund.  Examples of the investments typically held in money market funds are:
     
    • Certificates of Deposit (CDs)
    • Commercial Paper (a short-term debt instrument used by companies to finance their short-term liabilities)
    • U.S. Treasuries
       
  • Cash that is going to stay in the business for greater than 90 days provides a business owner with even more options to invest cash in other high-quality investments such as short-term U.S. Treasury bills.  Treasury bills are backed by the full faith and credit of the U.S. government.  They provide a higher return on your cash due to the longer time frame compared to money market funds.  Treasuries are a very liquid market, so if for some reason cash is needed sooner than anticipated, then T-bills can be sold and cash available in 2 days’ time.  These investments are commonly held to maturity to ensure the investor gets the specified rate of return when purchasing the Treasury bill.  Current yields (as of 3/16/2023) on these short-term Treasuries are:
     
    • 3 month - 4.73%
    • 6 month - 4.73%
    • 9 month - 4.60%
       
  • Another option for cash that is going to stay in the business for greater than 90 days is a Certificate of Deposit or CD.  This investment will usually offer the highest rates of return compared to the other investments above.  This is due to the lack of liquidity the product offers.  The money cannot be taken out without penalties or loss of promised interest.  A CD offers a fixed interest rate that will not change.  This certainty of promised rate of return that is backed by the federal insurance program is often a good alternative to other types of investments that provide volatility.  A business owner just needs to decide on the risk of not having the money readily available if something is needed to fund business activities.  These rates can vary among the many financial institutions that offer them, and if this is an option that someone is interested in, a great place to start is the financial institution that you work with or your financial advisor to find the best rate.  Also, you should be aware that CDs held in the same bank as your other deposits are subject to the same $250,000 FDIC limits per account registration. (Corporate, Individual, joint, etc.)

In closing, we hope that this provides a good overview of some of the options that you have for your cash so that you can increase the return and manage the risk for those assets.  

Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2024 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

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