April 18, 2024
Cash and Cash Equivalents

Where Do Companies Keep Their Cash?

If you have ever looked over a company’s balance sheet, you may have noticed the first account included under the current asset section is cash and cash equivalents. As the name might suggest, the “cash account” contains all of the company’s cash. A company may choose to keep their cash in a variety of places for various reasons – let’s take a deeper look at where, when, and why.

Understanding Cash

A company’s cash is usually stored in a bank account, or within an equivalent financial institution, from which the company is then able to pay its liabilities and other expenses. The cash equivalents account represents the company’s highly liquid investments that can be convert to cash within a few days. There’s a number of reasons why a company would need a checking account including but not limited to:

  • Checking accounts are designed for everyday financial transactions. They provide a convenient and secure way for companies to manage their day-to-day finances, including receiving payments from customers, paying bills, and making purchases.
  • Checking accounts offer a high level of liquidity. Funds held in a checking account can be readily accessed through checks, debit cards, electronic transfers, or online banking. This liquidity ensures that a company can quickly access cash for whatever reason they may need.
  • Banks often provide a secure environment for storing funds in checking accounts. The funds are typically insured up to a certain limit by government-backed deposit insurance programs such as the Federal Deposit Insurance Corporation (FDIC) in the United States.
  • Checking accounts offer a built-in record-keeping system. Companies can easily track their financial transactions, monitor cash flow, and reconcile their accounts to ensure accuracy in financial reporting and tax compliance.
  • Maintaining a checking account with a clear and documented transaction history is essential for auditing purposes and ensuring compliance with financial regulations and tax laws.

Checking Accounts

There are number of different types of checking accounts a company may choose to open, and companies may hold cash in several different types below to capitalize on different rewards or features. The types of checking accounts may include:

  • Standard Business Checking Account: This is the standard checking account for corporations and is used for their day-to-day financial operations. Business checking accounts offer features such as check-writing capabilities, electronic transfers, and access to online banking services. They are ideal for managing expenses, paying suppliers, and receiving payments from customers.
  • Interest-Bearing Business Checking Account: Similar to a regular business checking account, an interest-bearing business checking account allows corporations to earn interest on their account balances. While interest rates may be lower than other types of accounts, it provides a modest return on idle funds.
  • High-Yield Business Checking Account: These accounts offer higher interest rates compared to traditional business checking accounts. However, they may require corporations to maintain higher balances or meet specific criteria to qualify for the higher yield.
  • Business Sweep Account: A business sweep account automatically transfers excess funds from a corporation’s checking account into a higher-yield investment account (e.g., a money market account or short-term investments) to maximize returns while maintaining liquidity. This is useful for companies with fluctuating cash flows.

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  • Multi-Currency Business Account: For multinational corporations, multi-currency business accounts allow for holding and managing funds in various currencies, simplifying international transactions and mitigating exchange rate risks.

Savings Accounts

Similar to a checking account, a savings account is an account held at a financial institution to maintain a highly liquid balance of cash. Savings accounts may have operational limitations on them, though they often earn higher interest rates compared to checking accounts. In addition, a corporate savings account may be armed with a variety of features including but not limited to:

  • Business High-Yield Savings Account: These accounts offer competitive interest rates, often higher than standard savings accounts, to help businesses maximize their savings. High-yield business savings accounts may require higher minimum balances or meeting specific criteria to qualify for the higher rate, though they may not have full functionality of a checking account.
  • Business Online Savings Account: Online business savings accounts are managed through online platforms, providing convenience and flexibility. They offer features like electronic transfers, mobile check deposit, and digital account management, making them suitable for businesses that prefer digital banking or are seeking lower banking fees.
  • Business Sweep Account: Business sweep accounts automatically transfer excess funds from a business checking account into a higher-yield savings or investment account, optimizing returns while maintaining liquidity. They are useful for businesses with fluctuating cash flows.
  • Escrow Accounts: Escrow accounts are used to hold funds for specific purposes, such as real estate transactions or project funding. Businesses can use these accounts to ensure the safe and impartial management of funds until specified conditions are met. Funds are often put into escrow for a very specific purpose, and in some cases, funds are not meant to be held in escrow for long.
  • Business Merchant Services Reserve Account: Certain businesses, especially those in industries with high chargeback risks, may be required to maintain a reserve account to cover potential refunds and disputes. These accounts help protect against unexpected financial liabilities.

Cash Equivalents

The cash equivalents that a company may carry on its books are short-term investments that are highly liquid. The cash equivalents are considered to be just like cash. This is because they can be quickly liquidated and converted into cash at a fair price within a matter of days. There’s a number of different places a company can put its money as opposed to a checking or savings account; those places may include items below.

Money Market Accounts (MMAs)

A money market account is very similar to a bank account. However, interest that a company can earn on this account is slightly higher. There may be some restrictions imposed on the firm for using a money market account, such as a maximum number of transactions within the account during a specified period or minimum deposit requirements.

Treasury Securities

Treasury securities can range across different lengths, though companies will most likely want to keep cash in the most liquid security which is Treasury bills. Treasury bills can also provide the company with another alternative to keeping cash in a regular bank account. Treasury bills are government debt issues that are sold at periodic intervals. As T-bills can be resold within a public market at any time by the company, they are highly liquid, which allows them to also be classified as cash equivalents.

Other options here may include Treasury notes and Treasury bonds, though each of these securities has a different term period that make some more liquid than others. Treasury bills most often have a maturity less than one year, Treasury notes often have a maturity less than 10 years, and Treasury bonds usually mature between 20 and 30 years.

Commercial Paper

Commercial paper is a short-term debt instrument issued by corporations. It provides a source of working capital for companies and is considered relatively safe for investment-grade issuers. Companies can invest in commercial paper to earn interest income while preserving liquidity.

Corporate bonds are longer-term debt securities issued by corporations. They offer potentially higher yields compared to government securities but carry varying degrees of credit risk depending on the issuer’s financial stability. Companies may steer away from commercial bonds as they do carry higher risk and less flexibility, though it may work well with a company’s long-term cash holding strategy.

Foreign Currency

Companies may choose to hold foreign currency primary for international trade and business operations. When a company operates in multiple countries, it may receive revenue in different currencies. Holding these currencies allows the company to pay local expenses, such as salaries, rent, and utilities, without incurring exchange rate fees and risks. It also enables efficient and timely payments to suppliers, reducing the need for frequent currency conversions.

Additionally, holding foreign currencies can act as a hedge against adverse exchange rate movements, helping to stabilize costs and revenues in the face of currency fluctuations. Though some companies may hold foreign currencies for speculative reasons as an investment, there is risk of loss for this type of investment. Companies would be better suited holding less risky cash if it knows it needs the cashflow for operations.

Petty Cash

Petty cash is a small amount of cash that an organization keeps on hand to cover minor and everyday expenses, such as office supplies, postage, or small reimbursements, without the need for formal check or electronic payment processes. It is typically maintained in a physical cash drawer or box with a fixed, predetermined amount of money, and a designated custodian is responsible for managing and disbursing these funds.

Petty cash helps streamline small expense transactions, reducing administrative burdens and processing time while maintaining financial control and accountability. Periodically, the petty cash fund is replenished through a formal process, and any expenses incurred are recorded in the organization’s accounting system for proper documentation and tracking.

Example of Corporate Cash Holdings

As part of its 2022 annual report, Microsoft reported $104.8 billion of cash, cash equivalents, and investments as of June 30, 2022.1 The company also provided more details of this balance in the liquidity and capital resources section of the notes to its financial statement. The notes to its financial statements are below.

There are several things to consider regarding these notes:

  • Microsoft’s cash and cash equivalents materially declined from 2021 to 2022. This may have been due to some large acquisitions in which the company purchased several entities for cash or cash equivalents.
  • Microsoft moves cash out of its checking and savings accounts into “highly liquid investment-grade fixed-income securities”. This is most likely commercial paper of highly safe companies or Treasury bills.
  • Microsoft holds both U.S. currency and foreign currency as the company operates in different countries.

How Can Corporations Improve Cash Flow Forecasting?

Corporations can enhance cash flow forecasting by implementing best practices such as using advanced financial software, maintaining a rolling forecast that is regularly updated, comparing actuals to forecasts to identify variances, and stress-testing cash flow projections to prepare for various financial scenarios. With these practices in hand, companies can better understand what cash they need on hand and when they need that cash.

Why Do Companies Hold Foreign Currency?

Companies hold foreign currency to facilitate international trade, manage currency risk, and conduct business operations in multiple countries efficiently. Holding foreign currency allows corporations to transact in local currencies, reducing exchange rate fluctuations’ impact on financial performance.

How Do Corporations Handle Petty Cash?

Corporations handle petty cash by designating a custodian responsible for managing a small cash fund. The custodian disburses cash for minor expenses, tracks expenditures, and reconciles the fund periodically. Petty cash helps streamline small expense transactions while maintaining financial control.

What Impact Does Cash Management Have on a Corporation’s Financial Health?

Cash management has a profound impact on a corporation’s financial health. Effective cash management ensures the company can meet financial obligations, maintain sufficient liquidity, invest in growth opportunities, and withstand economic downturns. Poor cash management can lead to financial stress, liquidity problems, and operational challenges that can affect the overall financial health of the corporation.

The Bottom Line

Companies can keep cash in various locations and financial instruments, including bank accounts such as checking and savings accounts, money market accounts, government securities like Treasury bills, commercial paper, corporate bonds, or foreign currency deposits. Companies may want to consider one option or another for very specific reasons relating to each particular option.

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