Optimizing Cash Management: Building a Strategic Cash Reserve.
As a consultant CFO, my objective is to emphasize the importance of efficient cash management. Our goal is to create or improve your company’s financial strategy, to ensure both operational stability and optimal resource utilization.
The Near-Cash Account: Your Operational Foundation
The cornerstone of effective cash management is maintaining a near-cash account, or operational reserve, with “Local Bank” or equivalent. This account should contain enough liquidity to fund operations, ensuring stability even in the absence of revenue. Many businesses have at least six months of cash in near-cash accounts. This ensures business continuity, while maintaining the necessary agility to respond to unexpected challenges.
Beyond Operational Cash: The Strategic "Cash Reserve"
Many companies, even large enterprises, make the costly mistake of letting excess cash sit idle. Holding millions—or even billions—in low-yield deposits is equivalent to stashing money in a coffee can. This strategy misses opportunities for growth and undermines long-term business value.
To avoid this, surplus funds beyond your near-cash needs should be directed to a well-structured cash reserve strategy.
Such reserves can be allocated to low-market-risk investments offering consistent returns, often exceeding 10%. These investments are sourced from widely traded financial instruments that balance risk and reward.
A Practical Illustration
Consider Sally Smith’s Construction, Inc., (SSC) a mid-sized company with a well-managed cash reserve. Sally ensures six months of operational cash is deposited with Local Bank in a near-cash account. This provides a safety net for day-to-day operations.
Let’s say SSC has more than enough cash to cover six months of operation costs and creates a reserve cash account. SSC deposits $2 million into the reserve cash account. Instead of earning 1% at Local Bank yielding just $10,000 for six months, SCC’s reserve cash account generates 10More...