The fundamentals of cash investments

Many growing businesses keep more cash on hand than they need for daily expenses and upcoming bills. This extra cash could be a safety net, a fund for plans, or just the result of a good year. How a finance team invests this surplus affects the company’s risk, liquidity, and returns.

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

The basics of cash investments

Cash investments are short-term, high-quality options that help preserve capital and keep funds accessible when needed. Most mature within a year, but many mature in just days or weeks. For businesses, these investments fall between a regular bank account and longer-term assets like bonds or stocks. Their main purpose is to earn a return on extra cash without risking the original amount.

This category includes bank deposits, money market funds, UK Treasury bills, gilts close to maturity, and repurchase agreements. It also covers commercial paper and certificates of deposit from banks and well-rated companies. Many of these options also count as cash equivalents for accounting.

Cash as an investment asset

For a long time, treasury teams saw cash as whatever was left after managing the rest of the balance sheet. Changing this approach accelerated when the Bank of England’s Bank Rate returned from above near-zero, making returns on short-term cash more material. Now, leaving cash idle in low-interest accounts can cost a business real money. By treating cash as a strategic asset, companies can manage their reserves with the same care as other parts of the balance sheet.

The objectives behind every cash investment

Corporate treasury teams usually have three main goals for surplus cash, in this order: security, liquidity and yield. Security means making sure the business gets back all the money it invested. Liquidity is how fast and easily you can turn the investment back into cash. Yield is the return earned for taking on some credit and liquidity risk.

In practice, these three goals often compete, no single investment can feasibly maximise all of them. Higher yields usually mean locking cash away for longer or lending to less reliable borrowers, which reduces security or liquidity. A good strategy recognises this trade-off and sets clear limits on how much you can compromise on each goal.

Why risk-adjusted returns matter

Headline rates don’t always show the full picture when comparing cash investments. Two options might offer similar yields but have very different risks or access limits. Looking at risk-adjusted returns can help you compare options fairly before deciding.

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 investment timeline and liquidity needs. The exact breakdown depends on how predictable the company’s cash flow is and by how much its income and expenses can vary.

Operating cash

Operating cash covers payroll, supplier payments, and other expenses due in the next few days or weeks. It needs to be available right away, so is usually kept in bank accounts, overnight deposits, or daily-dealing MMFs. In this tier, easy access is more important than earning a high return.

Reserve cash

Reserve cash is a safety buffer for forecasting mistakes, seasonal changes, or unexpected expenses. The business might not need it for a few months, but it should be available if needed. Short-term investments with set maturity dates, like UK Treasury bills or fixed-term options of one to six months, work well for this tier.

Strategic cash

Strategic cash is saved for long-term needs like acquisitions, big projects, or paying off debt. The timing is usually planned, so investments can be matched to when the money will be needed. This tier can run longer to earn higher returns, as long as credit quality remains strong.

Where UK businesses invest surplus cash

Most UK businesses divide their surplus cash among different investment options, matching each to the tiers described above. The next three groups explain the choices most corporate treasury teams use.

Bank deposits and the FSCS

Instant-access, notice, and fixed-term deposits are familiar and easy options for holding business cash. These deposits are unsecured, so the business is exposed to the bank’s credit risk for the full amount. The Financial Services Compensation Scheme only protects deposits up to a certain limit per banking license. Since most corporate balances are much higher, the bank’s credit quality is the main protection.

Money market funds and the UK MMF regulation

MMFs collect cash from many investors and invest it in short-term government debt, bank deposits, CP, and reverse repo. UK funds follow the UK Money Market Funds Regulation, overseen by the Financial Conduct Authority, which sets rules for liquidity and diversification. Investors own shares in the pooled fund, not in any specific asset. Gilts, Treasury Bills and Repo

The UK Debt Management Office issues Treasury bills for HM Treasury, usually with maturities of one, three, or six months. Gilts, longer-term government bonds, can also be used as cash investments if bought near maturity. Direct access often requires special custody and trading arrangements that many mid-sized businesses lack.

A repurchase agreement, or repo, is a short-term secured loan where cash is exchanged for high-quality collateral, usually gilts or other government bonds. In a tri-party repo, an independent agent holds and values the collateral, making sure it covers at least 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 pay it back in full. This is the biggest risk for large corporate balances, especially when the cash is unsecured. Credit ratings, collateral, and limits on how much is placed with each counterparty help manage this risk. Our article on new dynamics in counterparty credit risk explains how this risk has changed.

Concentration risk

Putting a lot of cash with one bank or issuer, or in one jurisdiction, links the company’s liquidity to that institution or country’s health. Spreading cash across several strong counterparties and countries reduces the risk if one has problems. We discuss this idea more in why diversification matters for corporate cash.

Inflation risk

Inflation risk means the risk that the return on cash is diminished by the rate at which prices are rising. When this happens, reserves lose buying power, even if their face value stays the same. Comparing each investment’s yield to UK Consumer Price Index inflation shows whether reserves are keeping their real value.

Liquidity and reinvestment risk

Liquidity risk occurs when a business can’t access cash when needed, or can only do so by paying extra fees. Fixed-term products help manage this with set maturity dates, while some pooled funds may charge fees or limit withdrawals during tough times. Reinvestment risk is the chance that, when investments mature, they have to be reinvested at a lower rate if the Bank Rate drops. Many treasurers stagger their maturities so some investments are always coming due.

Are cash investments safe?

How safe a cash investment is depends on its structure, the issuer’s credit quality, and how well its maturity fits the investor’s needs. Short-term investments with highly rated governments or fully secured repo are the safest, while unsecured investments with lower-rated issuers are riskier. If an investor knows the exact issuer, maturity, and collateral, they can judge the risk more clearly. Our guide to the safest investment for your cash compares the main options in more detail.

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