Play Money

Some companies are earning high returns on their idle cash -- and living to regret it.

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Richard C. Russell was in trouble, and he knew it. A vice-president and treasurer of Danis Industries Corp., in Dayton, Ohio, he had invested a hefty chunk of his company's idle money in Mead Money Management Inc.'s Corporate Cash Management Fund, a mutual fund with $225 million in assets used by businesses with intermediate-term cash to invest. Before long, the mutual fund's share price took a nosedive. Fortunately, Russell knew what he had to do next. Before investing in the mutual fund, he had established target levels based on returns that would determine when he would sell Danis's shares. That is what he did, and, in the end, the family-owned construction company escaped with all but around $20,000 of its original investment.

Russell is, of course, not the only person to drop a few dollars in a mutual fund. But, unlike a lot of people, he had had the good sense to learn from his experience. Now when he invests Danis Industry's idle cash, he looks at security and liquidity first and high aftertax yields second.

That is a wise practice, but it is not always an easy one to follow (See INC., June 1983, page 48). Ever since interest rates started to rise in the early 1970s, corporate finance departments have been under tremendous pressure to boost earnings on "idle corporate cash" -- dollars that companies don't need for 90 days or more. And although interest rates have started to decline, the pressure hasn't let up. With venture capital harder to come by and the market for initial public offerings in a slump, many small, private corporations have started to look at their idle cash -- properly invested -- as a way to stretch their existing resources.

Exactly where small and medium-size companies should invest this money depends in large measure on the size of the company and how well it is capitalized. A big public corporation with, say, $10 million in idle cash can try a variety of investment vehicles, whereas a small private company with $100,000 doesn't have as many options.

Another consideration is the length of time for which the cash is to be invested. Money market mutual funds make sense only for intermediate and long-term cash. Six-month certificates of deposit (CDs) don't pay if you cash them in prior to their date of maturity. Also important is the amount of time executives can spare on tending the company's investments. "Your job," advises Edwin P. Morrow, chairman of Confidential Planning Services Inc., in Middletown, Ohio, "is not to be a financial wizard. It's to make widgets or whatever else it is you are in business to do." Another consideration in investing idle corporate cash is the tax situation of the company. Corporations in the 46% tax bracket need to weigh the tax implications of their investments. Companies that aren't making a profit and therefore aren't paying any taxes don't need to bother.

As a rule, all companies investing their idle cash must make security a prime consideration. And the safest place to deposit money is in CDs from banks and savings and loan associations. The money is insured by the Federal Deposit Insurance Corp. (FDIC) or the Federal Savings and Loan Insurance Corp., it earns fair market interest rates, and there is an added bonus -- depositing money in a bank helps a company build its relationship with its banker. "If you need money," says Beverley McKinney, a vice-president at First Huntington National Bank in Huntington, W. Va., "it's nice to know that money will be available. You can't get a loan from Merrill Lynch." That's a hard point to ignore, or so Kent Johnson, president and chief operating officer of Microrim Inc., a software manufacturer in Bellevue, Wash., decided. He considered depositing his company's cash elsewhere to capture a higher yield, then nixed the idea. "Our bank," he says, "stood by us during the tough times. It isn't worth messing up a good relationship to take our money elsewhere."

Major brokerage houses do not make loans, but they do offer higher yields. Consequently, many companies have begun investing their idle corporate dollars in the new money-market central asset accounts, such as the one offered by Fidelity Investments. The money-market funds invest in Treasury bills, government securities, and other money-market instruments. Central asset accounts usually yield about a half a point more than bank CDs. What's more, they allow customers to write checks on the money deposited. Many of these accounts also provide discount brokerage services, gold credit cards, traveler's checks, plus a small line of credit ($5,000). The initial investment for these accounts generally runs from $2,500 to $40,000. The fees for maintaining the accounts vary, starting at around $3 a month.

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