Where do you keep your cash reserves?
Hi! I’ve been curious about this for a while now, and have spent quite a bit of time reading research reports about it. After pouring through statistics and studies, I’ve decided to ask some entrepreneurs directly for input. So, here it goes. As an emerging business, where do you keep your cash reserves? In a bank savings account, in a money market fund, invested in equities (I imagine this is for larger businesses holding the reserves for longer periods of time), or somewhere else?
4 comments
Equities don't seem to be a good place for cash reserves. If you want to be able to plan future hires or purchases for your business based on how much money you have available, putting your money in an investment that can lose substantial value in a short period of time doesn't seem like a smart thing to do. A stock market crash can happen pretty quickly.
Owning a business is a risky enough investment, so you don't want to compound the risk it by investing your cash reserves in someone else's businesses.
The same is true for individuals. You don't want to put the money for your kid's next-year's college tuition into stocks. You're going to need to have that money available whether the market goes up or down this year. Stocks are a good investment vehicle for the long-term, but risky in the short-term.
Owning a business is a risky enough investment, so you don't want to compound the risk it by investing your cash reserves in someone else's businesses.
The same is true for individuals. You don't want to put the money for your kid's next-year's college tuition into stocks. You're going to need to have that money available whether the market goes up or down this year. Stocks are a good investment vehicle for the long-term, but risky in the short-term.
That’s very true. Thanks for the great input! Do you think it would be better for businesses to invest in money market funds or other reputable bonds then?
Bonds can also fluctuate in value over the short term. If you hold a bond to maturity, you're guaranteed to get your principal (original investment) and interest back (unless the bond issuer goes bankrupt). But if you need to use that money in the meantime, you'll need to sell your bonds at whatever the current market price is, which may be higher or lower than what you paid to buy them. If you buy very short-term bonds, like 4-week Treasury bills, this risk is minimized.
I think that investments that have a stable value, such as bank accounts and money market funds, are the safest choice for cash reserves. They're also convenient, since you can transfer money easily between these accounts and your business checking account.
I think that investments that have a stable value, such as bank accounts and money market funds, are the safest choice for cash reserves. They're also convenient, since you can transfer money easily between these accounts and your business checking account.
Agreed. This was what I was thinking too. I’m curious, how many businesses actually put their money in a money market fund as opposed to a checking or savings account?