Five Ways to Better Manage Cash in a Low-Rate Environment

BY: Sam Huntington

As if Covid-19 hasn’t presented enough challenges to businesses, the precipitous decline in interest rates in 2020 has many struggling to find a way to get a decent return on their cash reserves.

When the Federal Reserve took the unprecedented step of dropping interest rates 1.00% on a Sunday last March, businesses had to reset their expectations for generating revenue on excess funds. The Fed’s target rate zone has remained between 0.00% and 0.25% since then, and bank deposit rates have followed suit.

Depositors looking for risk-free investments outside of their banks haven’t fared any better, as yield on U.S. Treasury issues under one year has dropped to less than 0.10%. Even uninsured money market mutual funds haven’t offered refuge this year, as large providers, such as Vanguard and Fidelity, shut down their money market funds. 

Although a bank money market account offers a safe place to keep funds, there are other alternatives that a business might want to consider before parking excess capital there for the long term:

  • Certificates of deposit. If you believe rates will remain low for the next year or two, putting funds in CDs enables you to lock a higher rate in a safe investment. Many depositors use a “laddering” strategy of investing funds in CDs of different maturities, so that a portion of the funds becomes available more frequently, while still benefiting from the higher rates of a term investment.  
  • Taking advantage of trade discounts. If you make purchases from a supplier that offers trade terms, such as a 2% discount for payments made within 10 days or the full amount due in 30 days (2/10, net 30), you’re paying annualized interest of over 36% if you’re not taking advantage of the discount. While remaining mindful of monthly cash needs, taking advantage of trade discounts is a much better way to use your cash effectively.
  • Paying down debt with excess cash. This is a great opportunity to speak to your banker about using excess funds to pay down revolving or term loans. There are advantages and disadvantages to prepaying credit obligations, but having this conversation can give you a better understanding of your balance sheet and help you to identify situations where you can save on interest costs, while maintaining adequate cash on hand.
  • Reviewing other investment alternatives. The Wealth Management team at State Bank of Cross Plains speaks to businesses every day about the best use of business capital. Options for businesses to best employ excess funds include establishing/funding a retirement plan, higher yielding accounts, and tax-advantaged investments.
  • Consider capital expenditures. Making capital purchases with excess cash could save money by allowing your business to lower taxable income through increased deductions. The decision to purchase land, building, or equipment should be made with an eye to the business plan, and after consultation with your banker and accountant.
Any business that has been through 2020 already knows that even the best revenue projections often require mid-year adjustment. Anticipating further disruption to normal commerce is a pragmatic way to plan for cash needs in the near future and beyond. Please contact me (608) 826-3516 if you would like to discuss your cash management needs for the year ahead.

Sam Huntington

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