ACCOUNTING

Better Returns on Spare Cash

If your company has spare cash, alternatives to bank accounts and CDs can help generate extra working capital.
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Once your company outgrows the start-up phase -- and can amass a monthly bank balance of $100,000 or more -- cash management can be a big help in generating extra working capital. But in what's still a low-interest-rate environment, the secret is figuring out which alternatives to bank accounts and certificates of deposit fit your company's risk-reward profile.

Consider the experience of Meissner Manufacturing, a $15-million maker of pool filters in Burbank, Calif. "A few years ago our cash-management strategy consisted of buying CDs -- maybe 20 or so," recalls Christine Schaeffer, a vice-president. "Then we hired a new accountant who recommended that, as a first step, we consolidate those investments into one central asset-management account." Meissner acted on the advice, opening an account with investment firm Merrill Lynch.

Darren Luckfield, vice-president and manager of business investment services at Merrill Lynch in Princeton, N.J., emphasizes that small companies have plenty of options that are "much more appealing than a CD paying low rates of interest, which, after taxes, looks even less appealing."

For a start, he says, there are tax-free investments, which can make a significant difference if your company is in a high tax bracket. Meissner fits that description; the filter maker has started investing in mutual funds that hold tax-free municipal bonds. This past spring you could earn about 3.6% -- the taxable equivalent of 5.49% -- in a municipal-bond fund.

Another option is to extend investment maturities longer than 90 days, whenever you can tie up cash for as long as that. In mid-April a one-year treasury bill was paying 4.2%, compared with a money-market bank fund paying about 2.5%, according to Luckfield. The logic is compelling to Schaeffer: "We do cash-flow projections looking 6 to 12 months ahead, and whenever we can, we put them in somewhat longer-term investments."

Luckfield adds that corporations can find some attractive products if they're willing to try the more daring tactic of buying stocks rather than bonds. High-dividend preferred stock in blue-chip companies, for example, gives investors a good yield even when they hold the stock for a relatively short period, according to Merrill Lynch. (This past spring a share issued by utility Central Illinois Public Service was yielding 7.1% annualized, pretax.) For C corporations that can make use of the dividend-received deduction, 70% of the dividend is free from federal taxation, says Luckfield.

There's one final tip from Schaeffer: "If you're a small company like ours, you don't have the internal expertise to monitor the whole world of investments. So look for a brokerage that can suggest -- and explain -- a dozen alternatives for you to choose from whenever you've got some extra cash."

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Last updated: Jun 1, 1994




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