We have been running into a challenge faced by many business owners lately: what to do with excess cash on hand. From weathering COVID-19 well, PPP funds, and potentially EIDL loans, there are a lot of corporations sitting on excess cash. Previously, we defined excess cash or reserves as cash above what your monthly reserve of expenses is.
If you are spending $100,000 per month as a business on expenses, then we would say $600,000 in cash should be left in savings. Let’s say you have $1,500,000 in cash reserves. Our advice would be, what would it look like to start by taking $100,000 – $500,000 and doing something with that?
Assuming you have great cash-flow, are tracking your numbers closely, and adding to cash reserves monthly, sitting on excess cash is nice, but what is nicer is seeing those reserves work for you, especially if inflation picks up.
We keep saying it’s a great problem to have, but it is a problem. This is money you may need for a rainy day that may come sooner or may come later. So beyond just hanging onto it in a low to zero-interest savings or checking account, what can you do? (Side note: don’t get me wrong, having a savings plan is important, but there is so much more you can do with excess cash in your business.
One way to manage and build a company’s excess cash is to place a portion of it in a brokerage account. Your managed account can be pegged to different levels of risk tolerance, from conservative to aggressive. Most companies wanting to manage cash on hand will choose a conservative to moderate risk tolerance.
So how does a brokerage account work?
It is interesting and simple because it gets your money to work for you. A brokerage account does not tie up your money. It is liquid and accessible and can be connected to your business checking or savings account to maintain liquidity and allow for you to move funds into or out of the brokerage account easily.
This is done via an automated clearing house (ACH) transfer. This is a payment system you are probably familiar with, even if you don’t know what it’s called. The account is created and registered in the business’s name, so it is a corporate-owned asset and remains on your corporation’s balance sheet.
So, the money in a brokerage account is liquid and accessible. In the meantime, while it is in the account, the money is invested to target a 4-6% return, which is greater than what you will get from the bank. Also, while earnings are taxable from a brokerage account, the fees are deductible to the business.
What to Look for in a Brokerage Account
You can have a lot of control over how your brokerage account is managed. This is not a “set it and forget it” thing. We update our models quarterly and are reviewing the economy and markets throughout the year. We charge less than 1% annually to manage the account encompassing all the billed fees out of your account and again those are deductible to the business. We maintain custody of your funds at TD Ameritrade Institutional and can provide online access that allows you to review your account 24/7.
Professional Money Management
We utilize third-party money managers that have been managing money for decades with a focus on protecting the principal and generating consistent and more predictable returns. In a large company, the Corporate Treasury Department would oversee implementing a brokerage account strategy, at the direction of the C-suite. For a wider discussion of what the Treasury is, this article will fill in the details. When working at Deloitte, one of the big four accounting firms, we were able to work on Berkshire Hathaway’s investment portfolio and tested internal controls around their corporate treasury and investment processes. We got to see firsthand how Warren Buffet and Charlie Munger were investing corporate money in the stock market. We bring that experience to business owners and entrepreneurs on a scalable, liquid platform.
You’ll want a professionally managed account and not a self-managed account. You’ve got enough going on in your business without adding this to your list.
Our aim here is to show you what is possible with the excess cash your business is holding onto. We work with several managed brokerage account providers and would be glad to talk with you about your options. Click here to contact us.