Investing a Company’s Cash Reserves

This article was originally published on Victor Cuxart’s 'Finance Insights' blog.

It was co-written with Julian Lange, CFO at Upvest.

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Introduction

The still elevated interest rates compared to a couple of years ago is an opportunity for companies to generate additional income from their cash reserves. For CFOs, this represents a quick win directly impacting the company’s bottom line. In this article, Julian and I discuss the key factors to consider when investing unused funds and explore the different options available.

Why bother about investing a company’s cash reserves?

As obvious as it sounds, the first advantage is generating additional income for the company. Instead of letting cash sit idly in a non-interest-bearing account, a company can put it to work and earn a return. For example, a company that just raised a $100M Series C – as Upvest did a few months ago – can easily generate between €1-2 million in annual interest simply by placing the funds in fixed term deposits.

The second key benefit is risk reduction. Spreading cash deposits across multiple banks helps mitigate concentration risk. The collapse of Silicon Valley Bank in 2023 was a wake-up call for businesses that relied too heavily on a single financial institution. By diversifying their deposits, companies can ensure they are not overly exposed to the failure of any one bank.

Another important consideration is natural hedging. Companies with recurring expenses in foreign currencies can allocate a portion of their cash reserves in those currencies to mitigate exchange rate risk. By holding cash in a different currency that matches future expenses, businesses can reduce the impact of currency fluctuations and improve financial stability.

But what are the options available to CFOs for investing their company’s cash reserves?

Equity or digital assets can be risky

As a CFO, you don’t want to jeopardize your company’s survival in pursuit of higher yields. While investing in equities or other higher-risk instruments such as cryptocurrencies can offer higher returns, and may be advisable for you as an individual, it is generally not recommended for startups/scale-ups. Stock market fluctuations can lead to (temporary) capital losses, which can be problematic for companies that need to maintain liquidity and financial stability. Moreover, managing equity investments requires expertise and constant monitoring, making this option less attractive for most CFOs.

Nevertheless, investing a relatively small portion of the company's assets in stocks or ETFs can be an option when interest rates are close to zero, as seen during 2008–2015 and 2020–2022, primarily due to central banks' quantitative easing policies.

Money Market Funds: Decent returns with limited market risk

Money market funds (MMFs) provide an attractive solution for CFOs seeking liquidity, stability, and competitive returns. These funds invest in short-term, high-quality debt instruments such as Treasury bills, commercial paper, and certificates of deposit, offering diversification and a relatively low-risk profile.

MMFs are particularly useful for managing excess cash efficiently, as they allow for easy access to funds while still generating income. Additionally, they tend to offer better yields than traditional bank deposits. Given their short duration, MMFs are much less impacted by interest rate fluctuations compared to longer-term bonds, making them a resilient option for treasury management.

Longer-Term Bonds: Higher yields but more risk and less flexibility

Unlike MMFs, mid- to long-term bonds—such as corporate and government bonds—carry greater exposure to market risk. Interest rate fluctuations, credit spreads, and market liquidity can all impact bond prices, potentially leading to losses if the company needs to sell before maturity.

While these instruments may offer higher yields than MMFs, they require a more strategic approach to liquidity planning due to their longer duration and greater sensitivity to interest rate changes (unless held until maturity).

Companies investing in longer-term bonds must carefully balance risk and return, ensuring alignment with their cash flow needs and risk tolerance. In practice, these investments also require more expertise and monitoring, making them less attractive for a typical CFO (without a large treasury team) seeking an efficient and flexible way to invest their cash.

Fixed bank deposits: Flexible, secure and profitable

Fixed deposits, also known as term deposits, are one of the most straightforward and reliable investment options for unused funds. They offer a stable interest rate and come with different maturity options, allowing companies to plan their liquidity needs accordingly.

One of the main advantages of fixed deposits is that they currently provide relatively high returns with limited risk, depending on the credit rating of the bank. In some cases, banks offer penalty-free early withdrawals, providing an additional layer of flexibility. Benchmark interest rates vary depending on market conditions, and deposits’ maturity (generally 3, 6, 9 and 12 months), so it is advisable to compare offers from different banks before placing funds.

Certain banks may take 1–2 days to process a fixed deposit early withdrawal order, so it is important to anticipate this in cases of high urgency. CFOs should also negotiate with banks to secure a remunerated current account, ensuring that any idle cash continues to generate income.

However, fixed deposits still carry the going concern and balance sheet risk of the bank where the cash is placed, making it essential to assess the institution’s financial stability and diversify deposits.

Designing your investment strategy

A proper investment strategy aligns the company’s future liquidity needs, risk profile, and the current macroeconomic situation with the available investment options.

When forecasting the company’s future liquidity needs, it is advisable to consider an extra cushion on top of the expected monthly cash burn, most commonly expressed in a certain number of months of runway (e.g. 3-6 for startups/scaleups). This means that no matter what set of investments you choose to park your cash, you ensure you always have a minimum cash balance fully flexible, which would give you enough time to raise external funds if needed. At the same time, the cash forecasting exercise must be aligned with strategic options to account for potential M&A transactions or other larger one-off investments that could significantly impact cash reserves.

In general, if you operate in a dynamic environment (e.g., startup/scaleup context), you should prioritize flexibility (i.e., shorter durations) over optimizing for returns or interest rates, as your cash needs can change quickly. Remember that your investors most likely have a much higher return requirement than whatever you are earning from these investments. Therefore, having cash “stuck” in any way—unable to be invested in the growth or profitability of your business (which presumably generates those high returns)—doesn’t make sense.

When investing solely in fixed bank deposits, a commonly used technique involves two key steps. First, establish a minimum monthly cash balance threshold for the next 12 to 18 months to cover operational expenses. A general rule of thumb is to maintain operating cash equivalent to 3-6 months of runway, possibly plus a 20% cushion.

Second, distribute fixed deposit investments across different time horizons (usually 3, 6, 9, and 12 months), ensuring that, as the company approaches its minimum cash balance threshold, the reimbursements from maturing fixed deposits will top up the current account.

A Real-World Example

Let’s use the example of a Series B scale-up that has $50M of cash, with $900K of monthly net cash burn:

Adjusted monthly net cash burn: $1.1M ($900k +20% cushion)

Operating cash:

• $6.5M in a current account ($1.1M * 6 months period)

Near-term cash equivalents:

• $3M on a 3-month fixed bank deposit, penalty-free for early withdrawal

• $3M on a 6-month fixed bank deposit, penalty-free for early withdrawal

• $6M on a 9-month fixed bank deposit, penalty-free for early withdrawal

Long-term cash equivalents:

• $31.5M on a 12-months fixed bank deposit, penalty-free for early withdrawal

Find another illustrative example in FirstMark’s New Treasury Playbook 2023 report.

Another factor to consider is whether to involve a broker. For straightforward fixed deposits, direct negotiations with banks are often sufficient. However, if a company seeks to invest in a more complex mix of fixed-income instruments, consulting a financial advisor or broker may be beneficial.

Conclusion

In the current financial environment, investing a company’s cash reserves presents an opportunity for CFOs to create immediate value for their organization.

Among the available options, fixed deposits and money market funds stand out as the best risk/return solutions in today’s macroeconomic landscape, providing a safe and predictable way to generate interest income.

By carefully forecasting liquidity needs and considering the company’s specific circumstances and risk preferences, CFOs can optimize cash management while minimizing risk through efficient capital allocation.

About the author

Victor Cuxart is currently the Head of Finance at Pivot, based in Paris. He previously worked in M&A at PricewaterhouseCoopers, advising B2B software mergers and acquisitions in the UK and Spain. Victor also worked as a Venture Capital investor at Nauta Capital, a VC firm investing in Seed and Series A B2B software startups across Europe. He holds an MA in International Political Economy from King’s College London and a Bachelor’s degree in Business Administration from ESADE.