An Overview of Cash Management Products

Cash Management Overview
Treasury
Treasure Investment Team
|
December 8, 2023

Treasure provides professional cash management for businesses seeking safe, reliable income on their excess (non-operating) cash. We leverage a wealth of experience from our investment team, who bring decades of expertise from the world's leading hedge funds, asset managers, and pension funds. 

In this post, we are walking through some of the top options businesses can choose between for cash management. From the outside, cash management can appear complex. Our team hopes to break down some of the foundational building blocks of cash management and share some pros and cons of various approaches. 

Generally there are two ways to manage excess cash: Using bank products and/or deploying cash into ultra-low risk securities. The latter of the two approaches is typically the preferred option for treasury teams at advanced organizations (A Look Inside Apple Cash Management). We’ll take a look at the various options and who they are best suited for. 

Bank Products

Business Checking Account:

Designed for business transactions and operations, usually offering features like high transaction limits and multiple signatories. These accounts provide day-to-day operational liquidity that is necessary for businesses, however they are not ideal for holding surplus cash, due to zero to low returns and bank risk above insured levels.

  • Pros: High transactional utility and accessibility
  • Cons: Low or no interest on deposits, fees for various services, and only FDIC insured up to $250,000.
  • Topline view: Essential for daily business operations but not ideal for holding surplus cash, due to zero to low returns and bank risk above insured levels.

Money Market Accounts - 

Money market accounts are FDIC insured interest-bearing accounts that combine features of savings and checking accounts, offering higher interest rates with some check-writing capabilities.

  • Pro: High liquidity.
  • Con: Lower yields; bank risk (insured only up to $250k).
  • Expanded View: Ideal for short-term liquidity needs but less effective for yield maximization compared to other options below and inadequate for large sum of money (>$250,000)

High-Yield Savings Accounts -

High-yield savings accounts are similar to traditional savings accounts but offer higher interest rates. They are FDIC insured and typically limit the number of monthly withdrawals.

  • Pro: Better yield than regular savings.
  • Cons: Limited liquidity; bank risk (insured only up to $250k).
  • Expanded View: Suitable for moderately liquid reserves, offering marginally higher returns and inadequate for large sum of money (>$250k)

Certificates of Deposit (CDs) -

Certificates of Deposit (CDs) are fixed-term deposit accounts offered by banks and credit unions where customers deposit a specific amount of money for a predetermined period at a fixed interest rate. In exchange for agreeing to keep the funds untouched for the specified duration, depositors typically earn higher interest rates from the financial institution compared to the regular savings accounts they offer.

  • Pro: Higher yield for fixed terms.
  • Con: Reduced liquidity; bank risk (insured only up to $250k).
  • Expanded View: Good for funds not needed in the short term but inadequate for large sum of money (>$250,000)

FDIC sweep -

FDIC sweep provides services that allow depositors  access to FDIC insurance coverage beyond the standard insurance limits on their customers’ deposits. By leveraging its deposit allocation it enables banks to spread large deposits across multiple banks within its network. This process helps these banks ensure that customer funds are eligible for FDIC insurance coverage at each institution, thereby providing increased FDIC insurance protection.

  • Pro: Enhanced FDIC insurance coverage.
  • Con: Variable yield, often complexity in management.
  • Expanded View: Offers greater insurance coverage, suitable for large cash holdings needing traditional bank security on a larger amount of operating cash. Not optimal for yield.  

Securities

Treasury Bills -

Treasury Bills (T-Bills) are short-term debt securities issued by the U.S. government with maturities ranging from a few days to 52 weeks (one year). T-Bills are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government, making them virtually risk-free from default. They are highly liquid and used by investors and institutions as a means of preserving capital, managing liquidity, or as short-term investment options.

  • Pro: Highest yield among low-risk options; fully backed by the U.S. Government.
  • Con: Minor daily fluctuations.
  • Expanded View: Top choice for risk-averse investors seeking yield and security

Money Market Funds -

Not to be confused with Money Market Account, Money Market Funds are a type of mutual fund that primarily invests in short-term, low-risk securities. There are Government Money Market funds which only invest in Government securities (such as Treasury Bills) and there are Prime Money Market Funds which invest Treasury bills, commercial paper, and other highly liquid and safe instruments.  Money Market Funds are known for their stability, liquidity, and preservation of capital, making them a popular choice for investors seeking low-risk investment options with full liquidity.

  • Pros: Excellent yield; no bank risk for Government Money Market funds; high stability.
  • Con: Minimal management fee.
  • Expanded View: Great for investors prioritizing stability and liquidity with competitive yields and security

Corporate bonds -

Corporate bonds are debt securities issued by corporations to raise capital. When a corporation needs to raise funds, it may choose to issue bonds as a way to borrow money from investors. These bonds have a fixed maturity date, during which the issuing corporation pays periodic interest payments (called coupons) to bondholders at a predetermined rate, known as the coupon rate. Corporate bonds vary in terms of risk, yield, and credit rating depending on the financial stability and creditworthiness of the issuing company. Higher-rated bonds from financially strong corporations are generally considered safer investments and may offer lower interest rates, while lower-rated bonds (often referred to as high-yield or junk bonds) from companies with lower credit ratings carry higher risk but offer potentially higher yields to compensate for the increased risk.

  • Pro: Potentially high yield.
  • Con: Market risk; daily fluctuations.
  • Expanded View: Suitable for more risk-tolerant investors seeking higher returns through corporate debt instruments.

Comparative Analysis: Bank Products vs Securities

Bank products, while offering FDIC insurance and operational convenience, often provide lower yields and can have limitations in terms of liquidity and growth potential. They are best used by businesses to manage their operating cash (traditionally defined as ~3 months of cash reserves for things like payroll, insurance, marketing costs, etc.)  In contrast, government securities offer the full backing of the U.S. Government without any cap, bypassing the intermediary role of the FDIC. This direct government backing offers an unrivaled combination of security and potential for higher returns and is the ideal place for businesses to deposit non-operating cash in order to earn safe, predictable revenue on their excess funds. 

Treasure Financial is committed to providing clients with comprehensive cash management solutions. If you’re looking to optimize your business’s cash management program, drop us a note. Our expert investment team will provide a (free!) personalized consultation to explore the various cash management strategies which align with your specific goals, liquidity needs, and risk appetite. 

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