The fundamentals of cash investments

Many growing businesses hold more cash than they need for day-to-day expenses and upcoming bills. That surplus might be a safety net, a war chest for plans, or simply the result of a strong year. How a finance team invests it shapes the company's risk, liquidity, and returns.

This guide explains the basics of cash investments for US corporate treasurers, CFOs, and finance directors. It covers what qualifies as a cash investment, the objectives to keep in mind, the main options available in the US, the risks involved, and how a clear policy ties it all together.

The basics of cash investments

Cash investments are short-term, high-quality instruments designed to preserve capital and keep funds accessible when needed. Most mature within a year, and many mature in days or weeks. For businesses, they sit between an operating bank account and longer-term assets like bonds or equities. Their main purpose is to earn a return on surplus cash without putting the principal at meaningful risk.

The category includes bank deposits, money market funds (MMFs), US Treasury bills, Treasury notes close to maturity, and repurchase agreements. It also covers commercial paper and certificates of deposit issued by banks and highly rated companies. Under US GAAP (ASC 230), instruments with an original maturity of three months or less can generally be classified as cash equivalents, which matters for how these holdings appear on the balance sheet.

Cash as an investment asset

For years, treasury teams treated cash as whatever was left over after managing the rest of the balance sheet. Changing this approach accelerated when the Federal Reserve raised the federal funds rate from near zero in 2022, making the return on short-term cash a more material line item. Leaving cash idle in low-interest accounts now carries a real opportunity cost. Treating cash as a strategic asset means managing reserves with the same discipline applied to every other part of the balance sheet.

The objectives behind every cash investment

Corporate treasury teams usually have three goals for surplus cash, in this order: security, liquidity, and yield. Security means getting back all the money invested. Liquidity is how quickly and easily an investment can be turned back into cash. Yield is the return earned for taking on some credit and liquidity risk.

These goals often compete, and no single investment can maximize all three. Higher yields usually mean locking cash away for longer or lending to weaker credits, which reduces security or liquidity. A sound strategy recognizes this trade-off and sets clear limits on how far each goal can be compromised.

Why risk-adjusted returns matter

Headline rates rarely show the full picture. Two options can offer similar yields while carrying very different risks or access restrictions. Looking at risk-adjusted returns puts options on a like-for-like footing before you decide.

Segmenting cash by purpose

Good cash investing starts with sorting cash by when the business will need it. Many treasury teams use three tiers, each with its own time horizon and liquidity needs. The exact split depends on how predictable the company's cash flows are and by how much its receipts and payments can fluctuate.

Operating cash

Operating cash covers payroll, vendor payments, and other expenses due in the next few days or weeks. It needs to be available immediately, so it's usually held in bank accounts, overnight sweep vehicles, or same-day liquidity government MMFs. In this tier, access matters more than yield.

Reserve cash

Reserve cash is a buffer against forecasting errors, seasonal swings, or unexpected costs. The business may not need it for a few months, but it should be reachable if it does. Short-dated instruments with fixed maturities, like US Treasury bills or fixed-term placements of one to six months, suit this tier well.

Strategic cash

Strategic cash is set aside for longer-term needs such as acquisitions, major capital projects, or debt repayment. The timing is usually known, so maturities can be matched to when the money will be needed. This tier can run longer to earn a higher return, as long as credit quality stays strong.

Where US businesses invest surplus cash

Most US businesses spread surplus cash across several instruments, matching each to the tiers above. The options below cover the choices most corporate treasury teams use.

Bank deposits and FDIC insurance

Demand deposits, money market deposit accounts, and time deposits are familiar and easy ways to hold business cash. They're unsecured, so the business is exposed to the bank's credit risk for the full balance. The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per depositor, per insured bank, for each account ownership category. Most corporate balances sit well above that limit, so the bank's own credit quality is the primary protection. Some firms use reciprocal deposit networks to extend FDIC coverage across multiple banks, though this adds operational layers and doesn't change the exposure's underlying unsecured nature.

Money market funds and SEC Rule 2a-7

MMFs pool cash from many investors and invest it in short-term government debt, bank obligations, commercial paper, and repo. The SEC regulates US funds under Rule 2a-7 of the Investment Company Act of 1940, which sets requirements for credit quality, maturity, liquidity, and diversification. The SEC's 2023 reforms raised minimum liquidity requirements, removed the ability to suspend redemptions through gates, and require institutional prime and institutional tax-exempt funds to impose liquidity fees when daily net redemptions exceed 5% of net assets. Investors own shares in the pooled fund, not in any specific underlying asset.

Treasury bills, notes, and repo

The US Department of the Treasury issues Treasury bills with maturities ranging from four weeks to 52 weeks. Treasury notes, which are longer-dated government securities, can also serve as cash investments when bought close to maturity. Holding them directly usually requires custody and trading arrangements that many mid-sized businesses don't have.

A repurchase agreement, or repo, is a short-term secured loan in which cash is exchanged for high-quality collateral, typically US Treasuries or agency securities. In a tri-party repo, an independent agent holds and values the collateral daily, aiming to keep its value at or above the amount invested.

The risks of cash investments

Counterparty and credit risk

Counterparty risk is the chance that the bank or institution holding or borrowing the cash cannot repay it in full. For large corporate balances, especially unsecured ones, it's usually the biggest risk. Credit ratings, collateral, and limits on how much is placed with each counterparty all help manage it. Our article on new dynamics in counterparty credit risk looks at how this risk has shifted.

Concentration risk

Placing a large share of cash with one bank or issuer, or in one jurisdiction, ties the company's liquidity to that institution or country's health. Spreading cash across several strong counterparties and countries limits the impact if one runs into difficulty. We cover this in more depth in why diversification matters for corporate cash.

Inflation risk

Inflation risk arises when the return on cash may fall below the rate at which prices are rising. When that happens, reserves lose purchasing power even though their face value stays the same. Comparing each investment's yield with the Consumer Price Index, published by the Bureau of Labor Statistics, shows whether reserves are holding their real value.

Liquidity and reinvestment risk

Liquidity risk occurs when a business can't access cash when it needs to, or can only do so at a cost. Fixed-term instruments manage this through set maturity dates, while some pooled funds can charge liquidity fees during periods of heavy redemptions. Reinvestment risk is the chance that maturing investments have to be rolled over at a lower rate if the Federal Reserve cuts rates. Many treasurers ladder their maturities so that some investments are always coming due.

Are cash investments safe?

The safety of a cash investment depends on its structure, the issuer's credit quality, and how well its maturity fits the investor's needs. Short-term exposure to highly rated governments or fully collateralized repo generally carries less credit risk, while unsecured exposure to lower-rated issuers carries more. When an investor knows the exact issuer, maturity, and collateral behind a position, the risk is far easier to judge. Our guide to the safest investment for your cash compares the main options in more detail.

Putting a cash investment policy in place

A written investment policy turns these principles into clear rules for the finance team. It sets out permitted instruments, minimum credit ratings, maximum maturities, and the largest amount that can sit with any one issuer. It also defines who can approve investments and how the board or audit committee is kept informed.

A good policy evolves with the business. A venture-backed company fresh from a funding round has different needs from a multinational holding cash across several entities and currencies. Reviewing the policy annually keeps it aligned with the company's plans and risk tolerance.

What can a corporation do with surplus cash?

Most US corporations start with bank deposits and government MMFs, then add Treasury bills or secured options as cash balances and treasury capability grow. The board, or a delegated committee, sets how much can be invested within the approved policy. Finance teams should confirm the tax and accounting treatment of each option with their advisers before investing. Our article on excess cash and the options available explains how finance teams approach these decisions.

Building a stronger approach to cash investments

Cash investments work best when each one has a clear purpose, a defined time frame, and a known level of risk. Dividing cash into tiers, choosing suitable instruments for each, and setting clear policy limits give finance teams control over all three. Regular reviews show whether each investment is still performing.

TreasurySpring gives businesses direct access to high-quality cash investments from government, bank, and corporate issuers, including secured tri-party repo. Each investment is linked to a single issuer and a fixed term, with no pooling alongside other investors. Contact our team to explore how we can structure your cash investments on a risk-adjusted basis.

For anyone who can’t tell the difference between their SEC and their ASC, we’ve introduced our Treasury & Cash Investment Glossary.

*TreasurySpring’s blogs and commentaries are provided for general information purposes only, and do not constitute legal, investment or other advice.